Cl  Q ^.A Bk. 

Trinity  College  Library 

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■ - - - --  I 

Rec’d  i..i5?_br  | 


THE 


POSITIVE  THEOEY  OF  CAPITAL 


BY 

EUGEN  V.  BOHM-BAWERK 

COTOSELLOE  IN  THE  AUSTRIAN  MINISTRY  OF  FINANCE,  AND  HONORARY  MMFESSOR  OF 
POLITICAL  ECONOMY  IN  THE  UNIVERSITY  OF  VIENNA 


TRANSLATED  WITH  A PREFACE  AND  ANALYSIS 

BY 

WILLIAM  SMART,  MA. 

LECTURER  ON  POLITICAL  ECONOMY  IN  QUEEN  MARGARET  COLLEGE,  GLASGOW 


REPRINT  i9‘J8 

G.  E.  STECHERT  A CO. 


NFAV-YOHK 


Digitized  by  the  Internet  Archive 
in  2017  with  funding  from 
Duke  University  Libraries 


https://archive.org/details/positivetheoryof01bohm 


3 5 


TRANSLATOR’S  PREFACE 


In  his  Geschichte  und  Krilik  der  Kapitalzins-Theorieen  (1884),  -which 
I translated  in  1890  under  the  title  oi  Capital  and  Interest,  Professor 
Bohm-Bawerk,  after  passing  in  critical  review  the  various  opinions, 
nractical  and  theoretical,  held  from  the  earliest  times  on  the  sub- 
ject of  interest,  ended  with  the  words : “ On  the  foundation  thus 
laid,  I shall  try  to  find  for  the  vexed  problem  a solution  which 
invents  nothing  and  assumes  nothing,  but  simply  and  truly  attempts 
to  deduce  the  phenomena  of  the  formation  of  interest  from  the 
simplest  natural  and  psychological  principles  of  our  science.”  The 
Positive  Theory  of  Capital,  published  in  Innsbruck  in  1888,  and  here 
rendered  into  English,  is  the  fulfilment  of  that  promise. 

The  criticisms  directed  against  the  various  theories  of  Interest 
in  the  former  work  may  be  briefly  summarised  as  follows. 

The  Productivity  theories — those  which,  more  or  less  explicitly, 
attribute  the  existence  of  interest  to  the  productive  power  of  capital 
— are  dismissed  as  confusing  quantity  of  product  with  value  of  pro- 
duct, either  in  the  way  of  tacitly  assuming  the  identity  oi-ihejwo, 
or  of  fading  to  show  any  necessary  connection  between  them.  The 
problem  of  capital  is  a pr^lem  of  surplus  value,  and  value  does  not 
come  from  the  side  of  producliott-btrt-from  the  side  of  consumption. 
Capital  is  productive,  but  interest  is  not  its  product. 

The  Use  theories,  which  are  a more  or  less  scientific  expan- 
sion of  the  familiar  formula,  “ Interest  is  the  price  paid  for  the  use 
of  capital,”  are  shown  to  base  interest,  which  is  notoriously  an 
income  obtained  from  all  kinds  of  capital,  on  an  analogy  drawn 
from  one  special  kind  of  capital,  -viz.  durable  goods.  The  idea  that 
the  use  of  capital  is  something  distinct  from  the  using-np  of  capital, 
and  interest  something  different  from  the  price  of  the  principal, 
becomes  untenable  when  the  true  economic  nature  of  the  “ good  ” 
is  understood  as  the  sum  of  its  material  uses  or  services.  If  con- 
sumption is  only  a single  exhaustive  use,  and  use  only  a prolonged 
consumption,  the  payment  for  “ use  ” of  Capital  must  be  included 
in  the  price  of  capitd. 

In  the  Abstinence  theory,  which  makes  interest  a compensation. 


VI 


TRANSLATOR'S  PREFACE 


made  to  the  owner  of  capital,  for  his  renunciation  of  immediate  con- 
sumption, Bohm-Bawerk  sees  a confusion  of  the  origin  and  accumu- 
lation of  capital  with  the  source  and  cause  of  interest.  Abstinence 
will  account  for  the  owner  having  a sum  to  lend,  but  it  will  not 
account  for  that  sum  growing  3%  larger  in  a year’s  time. 

Lastly,  the  Socialist  or  Exploitation  theory,  which  makes  interest 
simply  a gain  from  exploited  labour,  is  shown  to  be  a theory  which 
could  only  arise  on  the  negative  basis  of  the  unsatisfactory  accounts 
hitherto  given,  and  on  the  positive  basis  of  a mistaken  value 
theory.  When  an  income  obtained  without  work  and  without  risk 
was  claimed  as  the  reward  of  abstinence,  and  when  all  value  was 
ascribed  to  the  action  of  material  labourers,  it  was  inevitable  that 
there  should  rise  a reactionary  theory  proving  that  interest  was 
robbery.  Thus  the  board  was  swept  clean  for  the  Positive  Theory 

A translator  who  does  his  duty  must  pass  the  work  he  renders 
through  his  own  mind.  The  necessity  this  imposes  on  him  of 
understanding  his  author,  and  getting  at  his  point  of  view,  should 
make  him  peculiarly  sensitive  to  certain  diflBculties  which  are  not 
removed  by  simple  translation.  Modes  of  thought,  arrangement, 
manner  of  working,  may  remain  foreign.  A translator’s  preface, 
then,  is  not  without  justification  if  it  anticipates  some  of  the  ques- 
tions that  are  sure  to  arise  in  the  minds  of  readers  more  accus- 
tomed, perhaps,  to  English  economics.  Now  as  the  main  difficulty 
of  the  present  work  is  that  alluded  to  by  Professor  Bohm-Bawerk 
in  his  own  Preface,  that_the  strikingly  simple  outlines  of  his  theory 
are  obscured  by  the  very  elaboration  and  completeness  with  which 
it_js_  w:prked__ouL  perhaps  the  best  service  I can  do  is  to  give  a 
short  direct  summary  of  the  main  argument,  expanding  on  one 
or  two  points  which  seem  to  me  to  require  commentary. 

Economic  science  being  based  on  an  analysis  of  the  industrial 
life,  the  first  question  in  a theory  of  capital  is  one  of  terminology : 
What  does  tjm  practical  world  mean,  and  what  has  it  hitherto 
meant,  by  the  word  Capital  ? Here  we  find  in  common  acceptance 
not  one  but  two  conceptions,  both  based  more  or  less  on  Adam 
Smith’s  old  distinction  between  National  Capital  and  Individual 
Capital.  It  is  quite  necessary  for  scientific  progress  that  the 
exact  distinction  between  these  two  conceptions  should  be  fully 
recognised,  but  it  would  be  useless  to  refuse  the  name  to  either  of 
them  : the  practical  world  would  not  follow  us.  On  looking  closer 
at  the  two,  however,  we  can  see  that  one  of  the  conceptions  really 
includes  the  other,  and  that  the  difficulty  may  be  avoided  by  adding 
an  appropriate  predicate  to  each.  Taking  as  basis  the  old  root 
idea  of  “an  interest-bearing  sum  of  money,”  we  may  define 
capital  in  its  widest  sense  (or  Acquisitive  Capital),  as  the  complex 
of  products  destined  to  the  Acquisition  of  goods.  Under  this,  as 
narrower  category,  we  put  the  conception  that  came  later  in  time, 


TRANSLATOR’S  PREFACE 


vii 

but  perhaps  better  deserves  the  name  without  predicate,  that  of 
Social  or  Productive  C^ita],  comprising  all  products  destined  for 
the  production  of  fresl^wealthj  briefly,  the  complex  of  Intermediate 
Products.  Thus  we  happily  preserve  in  both  conceptions  the  popular 
idea  of  “ income  bearing  ” : society  as  a whole  can  only  obtain 
an  income  by  “producing”  new  wealth,  while  the  individual  may 
“ acquire  ” it  as  well  by  the  transfer  of  old  wealth. 

By  these  definitions  Land  and  Labour  are  excluded  from  capital. 
They  have  certain  analogies,  even  close  analogies,  with  it,  but 
scientific  accuracy  is  not  gained  by  making  definitions  so  wide  as  to 
conceal  really  discrepant  elements.  The  definition  of  Social  Capital 
also  excludes  the  Maintenance  of  Labourers ; for,  obviously,  to 
include  the  direct  and  most  obvious  means  of  living  would  be  to 
take  away  all  possibility  of  distinguishing  between  capital  and  con- 
sumption wealth. 

The  subject,  then,  naturally  divides  itself  into  two  parts; — Capital 
in  the  narrower,  but  more  widely  important,  meaning  of  the  Instru- 
ment of  Production,  and  CapitaLas^the  Source  of  Income. 

First,  of  the  Instrument,  of  Production.  In  the  economical 
Avorld  man  finds  himself  a being  of  infinite  want,  confronted  with  a 
universe  full  of  potential  wealth  but  with  no  tools  except  hands 
and  brains  to  give  him  possession  of  it.  Incapable  of  creating  any- 
thing.  he  yet  finds  himself  endowed  with  a power  of  moving  things, 
which,  as  he  masters  the  secrets  of  nature’s  working,  gradually 
enables  him  to  imprison,  impress,  or  suspend  the  action  of  her 
powers,  and  so  make  her  his  servant.  In  various  concrete  ways  he 
adapts  or  rearranges  nature — never,  of  course,  changing  her  laws 
or  acting  contrary  to  them,  but  varying  the  causal  connection  of 
natural  processes  in  such  a way  that,  to  a large  extent,  he  remakes 
the  natural  world  to  suit  his  purposes.  Thus,  between  man  and 
his  natural  environment  there  gradually  grows  up  a third  term, 
a machinery  for  the  fuller  satisfaction  of  man’s  life,  and  to  this, 
in  general  terms,  we  give  the  name  Capital.  But,  however  the 
growth  of  wealth  and  industry  disuse  the  fact,  in  all  production 
of  wealth  there  are  only  two  original  forces  at  work,  nature’s 
powers  and  man’s  powers.  Human  powers,  as  always  limited, 
and  as  always  put  forth  “ at  the  cost  of  ” brain  or  tissue,  are  all 
“ economic  ” ; but  in  the  great  treasury  of  natural  forces  there  are 
some  powers  so  universal  in  their  scope  and  working  that  they  do  not 
enter  into  calculations  of  cost.  As  we  say,  using  two  phrases  whose 
full  significance  we  do  not  always  realise,  we  do  not  “ economise  ” 
the  free  gifts  of  nature — they  “ cost  ” us  nothing ; although  they 
enter  into  the  operations  of  all  production,  they  do  not  enter  into 
“ economic  ” consideration.  The  original  factors  of  production,  then, 
are  man  and  nature  : the  strictly  economic  factors  of  production 
are  labour  and  those  natural  forces  (called  by  metonymy  Laud) 


viii 


TRANSLATOR'S  PREFACE 


which  are  limited  and  capable  of  being  monopolised.  But  Capital, 
however  much  credit  it  gets  and  deserves  for  its  work  in  present- 
day  production,  is  no  independent  factor  alongside  of  these.  In  one 
aspect  it  may  be  called  “ stored-up  labour,”  in  another — and  more 
truly — “ natrff.al.force^stored_uix--by-4abour  ” but  in  capital  itself, 

, alike  in  its  origin  and  in  its  working,  there  is  nothing  that  is  not 
accounted  for  by  the  other  two  factors. 

We  say,  in  its  origin  and  its  working,  and  it  is  advisable  to 
emphasise  that  these  are  distinct  things.  The  origin  of  capital 
is  due  to  two  factors,  Industry^  and  Saving,  both  being  indis- 
pensable. It  should  be  noted,  however,  that  what  is  saved  is 
not  capital  but  productive  power.  The  primitive  labourer  works 
overtime,  produces  a surplus  subsistence,  and  spends  it  in  making 
tools  : his  saving  is  saving  of  strength  to  make  tools.  The  modern 
worker  produces  a surplus  over  his  subsistence  : gives  that  over  to 
banks  and  other  agencies  to  be  spent  in  building  factories,  erecting 
machinery,  etc.:  what  is  saved  is  the  natural  forces  thus  put  in 
position  to  turn  out  consumption  goods.  But  when  we  know 
the  origin  of  capital,  we  have  stiU  to  ask : What  is  the  nature 
, and  character  of  the  production  carried  on  by  means  of  capital  I 
The  answer  may  be  put  in  the  follovong  way.  The  aim  of 
production  is  essentially  the  making  or  procuring  of  a living. 
The  animal  finds  a certain  provision  spontaneously  offered  it  in 
nature ; goes  straight  toward  that  provision ; and  never  gets 
beyond  it.  Man,  on  the  other  hand,  even  in  the  simplest  state, 
takes  an  indirect  course.  He  allies  natural  with  his  own  (still 
natural)  forces;  and  he  gets  behind  these  natural  forces,  setting 
them  against  each  other,  or  co-operating  with  each  other  in  carry- 
ing out  his  instructions.  He  steals  fire  from  heaven,  and  turns 
I it  against  the  gods.  The  end  is  always  the  consumption  good — 

! the  good  which  exhausts  itself  in  ministering  to  man’s  life  in  ' 
its  higher  and  lower  forms;  the  factors  are  always  labour  and 
nature ; but  the  way  in  which  the  end  is  reached  is  here  indirect, 
lengthy,  and  roundabout.  From  the  rude  spade,  which  the  savage 
first  uses  as  a medium  between  his  bare  hai^jls  and  the  fruits  or 
roots  he  lives  on,  down  to  the  many  years’  production  process 
stretching  between  the  sinking  of  the  shaft  for  coal  or  iron  and 
the  flying  shuttles  turning  out  the  cloth  which  finds  its  goal  in 
covering  bare  backs,  is  simply  an  evolution  of  the  roundabout 
method.  The  course  of  economic  progress  puts  increasing  inter- 
vals between  preparatory  and  finishing  labour,  decreasing  the  stock 
by  increasing  the  tools ; and  at  every  new  stage  labour  embodies 
itself  in  further  intermediate  products  or  capital.  The  character- 
istic result  is  twofold.  As  we  should  expect  from  the  accumula- 
tion and  concentration  of  natural  forces,  this  capitalist  method  is 
immensely  productive  as  compared  with  direct  or  unassisted  labour. 


TRANSLATOR’S  PREFACE 


IX 


On  the  other  side,  however,  is  to  be  put  the  sac:^cis_of  Tinae 
necessarily  involved  in  the  indirect  process.  The  relation  of  these 
two  sides  must  be  carefully  noted.  As  time  plays  a greater  part  in 
production — as  the  average  period  is  extended — the  absolute 
productiveness  of  the  capitalist  process  increases,  but  the  relative 
productiveness  decreases.  That  is  to  say ; when  the  process  has 
reached  a certain  point,  it  becomes  subject  to  a law  of  diminishing 
returns.  ^ 

The  function,  thei:^,_of  capital  in  production  may  be  said  to  be; 
that  of  allowing  labour-and  .natural  powers  to  work  out  their(, 
economic  effects  in  processes  that  take,  time,  or  the  utilisation  of/ 
natural  forces  in  roundabout  methods.  Or,  if  we  adopt  the 
peculiarly  modern  view  that  man  is  the  economic  Zidpunkt,  we 
may  say  that  capital  gives  time  to  labour  to  avail  itself  of  those 
powers  of  nature  which  become  available  only  at  a considerable 
sacrifice  of  time. 

So  much  for  the  function  of  capital,  and  one  is  apt  to  jump  to 
the  conclusion  that,  having  shown  how  capitalist  industry  produces 
a great  quantity  of  products  as  compared  with  unassisted  labour, 
the  sole  and  sufficient  origin  of  interest  has  been  indicated.  A little 
consideration  will  show  that  we  are  yet  on  the  threshold  of  that 
inquiry.  The  concrete  result — the  raison  d’etre — of  a factory  is  the 
mass  of  products  it  sends  to  market.  These  are  the  transformed 
shapes  of  raw  and  auxiliary  materials,  machinery  generally,  and 
labour ; and  the  price  realised  for  them  repays  the  outlay  on 
materials,  keeps  up  the  machinery,  and  pays  the  wages — including 
all  the  wages  of  intellect.  But  beyond  the  repaying  of  all  these 
costs  it  is  a familiar  fact  that,  in  normal  production,  the  prices 
realised  leave  a surplus.  This  surplus  is  not  accounted  for  by  pro- 
fits, although  often  confused  with  them.  Profit  is  either  employer’s 
wage  (and  is  thus  already  included),  or  it  is  the  chance  of  a happy 
conjuncture  that  allows  a higher  price  to  be  obtained  than  is 
normal — which  chance  is  continually  being  levelled  down  by  com- 
petition. But  this  surplus  is  recognised  as  something  due  to  the 
owner  of  capital  without  claim  of  personal  work  from  him,  and 
it  is  a surplus  of  value  which  competition  cannot  wipe  out.  In 
Bohm-Bawerk’s  former  book.  Capital  and  Interest,  it  was  exhaustively 
proved  that  no  theory  had  yet  shown  what  capital  does,  or  forbears 
from  doing,  that  it  should  get  this  surplus  under  the  name  of  interest. 
It  is  not  a payment  for  the  labour  embodied  in  concrete  capital,  for 
that  labour  is  presumably  fully  paid  for — say,  by  the  machine  maker 
to  his  men  and  to  himself — and  does  not  warrant  a further  continuous 
payment.  It  is  not  a payment  for  the  working  of  natural  forces 
embodied  in  the  machine,  for  the  value  of  the  machine  consists  in 
nothing  else  than  in  the  working  of  these  forces,  and  in  the  price 
is  already  paid  all  the  forces  that  the  machine  will  put  forth  and 

h 


X 


TRANSLA  TOR’S  PREFA  CE 


mediate.  And  it  is  not  wear  and  tear,  nor  is  it  insurance  against 
risk,  for  in  all  normal  undertakings  these  are  provided  for  by 
separate  replacement  and  insurance  funds.  For  proof  of  these 
statements  I must  refer  the  reader  to  that  book,  or  the  brief 
summary  of  it  in  the  preface.  What  must  be  emphasised  here 
is  that  the  explanation  of  capital  as  the  Instrument  of  Production 
y is  exhausted  when  it  is  shown  that  it  allows  nature  and  labour  to 
\ work  out  their  effects  in  lengthy  processes.  The  source  of  interest 
^will  Qot  be  found  simply  within  the  sphere  of  production,  for  the 
reason  that  interest  is  a problem  of  surplus  value,  and  value  takes 
us  into  the  sphere  of  distribution.  Thus  we  come  to  the  next 
division  of  the  present  work.  Capital  as  it  appears  in  the  sphere  of 
Distribution,  or  Capital  as  the  source  of  the  income  called  Interest. 

If  we  begin,  as  usual,  by  asking  what  business  people  under- 
stand by  interest,  we  shall  be  told  practically  that  a sum  of  money 
paid  down  now — say  £100 — will  buy  a greater  sum — say  £103  or 
£105 — this  day  twelve  months.  Or  if  I owe  £100  now  for  goods 
received,  and  do  not  pay  the  debt  for  a year,  I have  to  add  a 
certain  amount  under  the  title  of  interest. 

The  most  obvious  fact  here  is  that  the  payment  of  interest  has 
some  very  definite  connection  with  the  time  when  payment  is 
made.  This  suggests  the  general  question  : What  is  the  place  and 
influence  of  time  on  the  value  of  goods.  And  the  answer  is : It 
f^is  an  empirical  fact  of  undoubted  universality  that  present  goods 
/ are  valued  more  highly  than  future  goods  _of  like  kind  and  amount. 

For  this  three  causes  may  be  given.  . First,  is  the  difference 
between  the  circumstances  of  want  and  the  provision  for  want  in 
present  and  in  future.  In  any  case,  if  want  is  pressing  and  pro- 
vision is  scarce,  value  is  high.  But  the  pressure  of  want  in  the 
present  is  always  with  us,  while  as  regards  provision  in  the  future 
it  is  generally  true  mine  ignotwn  gno  mirijico.  Thus  present  goods 
obtain  a permanent  importance  from^ielt^jre^en^wants,  and  future 
goods  a permanent  unimportance  from  anticipated  future  provision. 
Most  men,  accordingly, — people  in  immediate  distress  and  beginners 
of  all  sorts  being  types — are  willino-_j;o__pledge  their  future  for  a 
really  inadequate  present  sum.  (^cond,  is  the  general  under- 
estimate of  the  future,  common  to  humanity,  and  traceable  to  want 
of  imagination,  defect  of  will,  or  feeling  of  life’s  uncertainty. 
Children  and  savages  are  typical  of  the  improvidence  which  is 
more  or  less  striking  in  all  classes.  It  may  be  that  this  cause  is 
not  on  the  same  level  with  the  first,  and  tends  to  less  importance 
with  social  progress.  But,  in  the  world  as  it  is,  it  is  certain  that 
the  things  of  the  ^iire  are  of  less  value  to  us  simply  because  they 
are  future.  A^f^ird,  is  the  technical  superiority  of  present  goods. 
As  we  have  already  seen,  in  the  hands  of  labour  wealth  increases 
enormously  with  the  extension  in  time  of  the  production  process. 


TRAJVSLATOJ^’S  PREFACE 


Goods  available  now  have  accordingly  the  promise  and  potency  of 
being  greatly  multiplied  in  the  future,  while  goods  coming  into  our 
disposal  only  in  the  future  must  undergo  another  period  of  pro- 
duction before  the  same  abundance  is  reaped.  Of  these  three 
causes  the  first  two^  arei  cumulative,  the  alternative.  TheiJ 

first  group  alone  would  account  for  a difference  in  value  betweenf 
jmesent  and  future  goods  : the  appearance  of  the  latter  makes  the* 
difiference  not  only  apparent  but  measurable. 

If,  then,  from  so  many  sides  and  classes — from  the  young  who 
expect  to  be  better  off,  from  the  rich  and  improvident  who  wish  to 
enjoy  the  present,  from  the  industrious  who  wish  to  add  to  their 
wealth ; that  is  to  say,  from  probably  the  majority  of  mankind — 
there  comes  an  underestimate  of  the  future  compared  with  the 
present,  it  is  easily  explained  why,  as  a rule,  present  goods  have  a 
greater  value  than  future  goods  of  like  kind  atid  amount. 

I In  this  empirical  and  psychological  fact,  for  the  full  treatment 
j of  which  the  reader  is  referred  to  Book  V.,  our  author  finds  the 
I source  of  interest  in  its  three  principal  forms.  q. 

The  simplest  case  of  interest  is  that  in  which  it  appears  in  the 
loan  for  consumption.  Here  we  have  a real  and  true  exchange  of 
a smaller  amount  of  present  money,  or  present  goods,  for  a larger 
amount  of  future  money  or  goods.  The  sum  returned,  “ principal  ” 
plus  interest,  is  the  market  valuation  and  equivalent  of  the  “ prin- 
cii)al  ” lent.  The  apparent  difference  in  value  is  simply  due 
to  our  forgetting  that  £100  in  our  hands  now  is  not  the  same 
thing  as  £100  a year  hence.  This  Agio  on  present  goods  is  interest. 

In  other  words,  interest  is  a complementary  part  of  the  price ; 
part  equivalent  of  the  “principal”  lent. 

In  this  simple  case  interest  is  more  evidently  the  result  of  the 
first  two  causes  just  mentioned.  Apart  altogether  from  an  organ- 
ised system  of  production  this  agio  would  emerge,  and  has  emerged, 
as  something  claimed  by  the  saving  from  the  unthrifty.  But  so 
long  as  there  was  no  organic  production,  the  circumstances  of 
borrowers  and  lenders  wei’e  too  diverse  and  arbitrary  to  allow  of 
a measured  rate  of  interest.  But  when  the  third  factor  comes  into 
play,  time  becomes  a condition  of  surplus  product,  and  interest 
becomes  measurable  in  terms  of  time.  ^ 

The  second  and  principal  form  assumed,  then,  by  interest  is  that 
in.  whicFltappears  as  part  of  the  so-called  “profit  of  undertaking.” 

A capitalist  employer  hires  land,  buys  raw  and  auxiliary  materials, 
machinery,  power,  and  labour.  He  sets  these  to  co-operate  in  the 
making  of  a product.  The  product  is  the  new  shape  taken  on  by  all 
these  productive  goods,  and  we  should  naturally  expect  that  the  price 
obtained  for  it  would  exactly  cover  and  reimburse  the  value  of  all  the 
goods  consumed  in  making  it.  But,  as  we  know,  after  all  ordinary 
costs  arc  accounted  for,  the  price  obtained  in  normal  economic  circum- 


/ 


TRANSLATOR'S  PREFACE 


xii 

stances  shows  a surplus  of  value.  The  explanation  oi  the  surplus  is 
that  productive  goods,  while  materially  and  physically  present,  are, 
to  economical  consideration,  future  goods  : that  is  to  say,  they  are 
products  in  the  making.  The  wants  to  which  they  minister,  and 
from  which  alone  they  get  their  value,  are  future  wants.  On  the 
admitted  ground  of  equivalence  between  costs  and  products,  then, 
the  value  of  the  means  of  production  must  be  the  same  as  the  value 
of  the  goods  into  which  they  pass.  But  these  goods  being  in  the 
meantime  future  goods,  and  suffering  from  the  discount  which,  as 
we  have  seen,  is  made  on  all  future  goods,  the  value  of  means  of 
production  must  suffer  the  same  discount.  The  undertaker  inten- 
tionally turns  his  wealth  into  productive  goods : that  is  to  say,  he 
exchanges  his  money  for  raw  materials,  workshops,  machinery, 
'^labour.  In  the  production  process  these  ripen  into  present  goods, 
with  the  full  value  of  present  goods.  The  price  he  receives  for 
these  recoups  all  his  expenditure  plus  interest.  Interest  thus 
V' proves  itself,  as  before,  the  difference  between  the  formerly  future 
and  now  present  goods. 

There  is  a third  case  of  interest  which  has  some  features  so  puzz- 
ling as  to  demand  separate  consideration  : this  is  the  case  of  income 
obtained  from  Durable  Goods,  usually  called  Hire  or  Lease,  and,  in 
one  case.  Rent.  The  distinction,  between  a perishable  and  a durable 
good  is  that,  while  both  are  the  sums  of  their  respective  uses  or 
services,  the  durable  good  is  a sum  extending  over  a period  of  time. 
But  on  our  theory  the  later  services  of  such  a good  must  have  a less 
value  than  the  proximate  services,  and  the  total  value  of  the  good 
will  be  a sum  of  diminishing  amounts.  The  “ capital  value  ” of  such 
a good,  then,  will  be  to  all  appearance  much  less  than  the  sum  of  the 
values  really  obtained  during  its  lifetime.  Here,  as  in  the  former 
cases,  the  services  originally  undervalued  ripen  to  full  present  value 
in  the  hands  of  the  owner,  and  the  difference  between  the  past  and 
the  present  values,  after  providing  for  replacement  of  the  good,  is 
Interest.  Thus  if  the  owner  of  capital  throws  his  parent  wealth 
into  the  form  of  stone  and  lime,  he  possesses,  in  the  durable  shape 
of  a house,  a sum  of  future  uses  discounted  according  to  their 
futurity.  As  each  year  passes  one  annual  service  is  realised,  and  its 
value  is  thrown  off,  while  each  service  still  to  be  realised  is  one  year 
nearer  the  present,  and  is  thus  one  year  more  valuable.  The  house, 
as  now  containing  one  rent  less,  is  less  valuable,  and  this  loss  falls  to 
, be  deducted  from  the  gross  return  as  wear  and  tear.  But  what  is 
J lost,  be  it  noted,  is  not  one  annual  service  estimated  at  present 
value ; it  is  the  last  future  service  of  which  the  good  is  still  capable, 
— for  if  all  the  s rvices  have  moved  up  one  step  in  value  it  is  the 
value  of  the  last  service  that  drops  off.  The  difference  between  the 
present  service  realised  (gross  rent)  and  the  last  service  now  deducted 
(economic  wear  and  tear)  is  the  net  return  of  interest.  Thus, 


TRANSLATOR'S  PREFACE 


xiii 

again,  we  find  that  interest  is  the  difference  between  the  formerly 
future  and  now  present  goods.  This  somewhat  difficult  point  is 
made  clear  from  the  concrete  figures  on  pj).  342-345. 

It  will  be  seen  that  in  this  we  have  a theory,  not  only  of  durable 
consumption  goods  such  as  houses,  and  of  durable  productive  goods 
such  as  machinery,  factories,  and  fixed  capital  generally,  but  a theory 
which  carries  us  beyond  our  formal  definition  of  Capital  into  the 
k sphere  of  Land.  In  land  we  have  a durable  good  whose  services  will 
i\  be  rendered  to  generations  unborn  : the  “ last  ” service  is,  therefore, 
to  the  calculations  of  the  present,  nil : there  is  no  economic  wear 
and  tear— no  need  of  any  fund  for  replacement — and  the  gross 
return  suffers  no  deduction  but  is  all  interest.  To  put  it  concretely. 

A man  buys  land  as  he  buys  fixed  capital ; — to  get  an  interest  from 
it.  He  buys  its  annual  services  or  rents  for  a sum  which  represents 
the  future  services  diminished  in  perspective.  In  other  words  the 
‘‘  capitalised  value  ” is  not  an  infinite  number  of  years’  rents  but  so 
many  years’  purchase.  In  his  hands  the  future  uses  ripen  into 
present : ^e  gets  the  present  value  of  what  he  bought  as  future 
valuej  as  there  is  no  wear  and  tear,  nothing  of  this  need  be  set 
aside  for  replacement : the  whole  gross  rent  is  net  interest.  Ricardo, 
in  pointing  to  the  “ original  and  indestructible  powers  of  the  soil  ” 

/as  the  cause  of  rent,  was  right  so  far  as  his  explanation  indicated 
/ why  the  gross  return  was  also  the  net,  but  wrong  so  far  as  it  indicated 
/ that  rent  was  due  to  the  productiveness  of  this  peculiar  kind  of 
/ durable  good.  The  interest  on  a mine  and  the  rent  from  land  are 
j essentially  the  same,  although  the  one  should  wear  out  in  thirty 
' years  while  the  other  is  “ indestructible.” 

These  are  the  simple  outlines  of  the  Positive  Theory.  By  it 
all  three  kinds  of  interest  are  traced  to  the  one  identical  source, 
the  increasing  value  of  what  are,  either  naturally  or  economicallj^/^ 
future  goods,  as  they  ripen  into  present  goods.  But  when  dealing 
with  the  principal  fonn  of  interest,  that  in  which  it  appears  as 
part  of  the  profit  of  undertaking,  Dr.  Bohm-Bawerk  makes  along 
excursus  into  the  relation  of  wealth  to  labour,  which  is  not  the  least 
suggestive  and  valuable  part  of  the  work.  As  it  suffers  somewhat, 
however,  from  its  position  in  the  text,  I shall  take  the  liberty  of 
putting  it  in  my  own  way. 

There  are  three  markets  in  which  the  particular  kind  of  “ future 
goods”  known  as  means  of  production  are  exchanged  against 
finished  present  goods — practically  against  money ; these  are  the 
Labour  market,  the  Land  market,  and  the  market  for  Concrete 
Capital.  Taking  the  Labour  market  as  the  most  typical  and  the 
most  difficult,  its  prominent  features  are  these.  On  the  one 
side  are  the  Capitalist  Undertakers.  These  are  men  presumably 
possessed  of  a surplus  of  wealth  which  they  cannot  advantageously 
use  in  their  own  consumption ; to  them  personally,  therefore,  the 


XIV 


TRANSLATOR'S  PREFACE 


present  goods  which  constitute  their  surplus  have  per  se  no 
advantage  over  future  goods.  But  in  this  surplus  they  have 
the  means  of  waiting  over  lengthy  processes  of  production  As 
their  wealth  increases  the  average  period  of  production  is  ex- 
tended, and  with  every  extension  the  absolute  productiveness  of 
the  process  increases.  On  the  other  side  is  the  majority  of  the 
population,  the  Wage-Earners.  Their  circumstances,  as  a class,  are 
such  that  they  cannot  engage  in  any  independent  production  that 
takes  time.  Even  if  they  could,  their  production  period  would 
necessarily  be  short,  and  in  competition  with  the  long  process  the 
handicap  would  be  too  heavy.  It  may  be  assumed,  therefore, 
that  they  will  rather  take  service  as  “ hands  ” than  risk  independent 
production. 

Evidently  the  big  battalions  are  on  the  side  of  the  capitalist, 
and  in  regard  to  this  particular  kind  of  present  good.  Labour,  it 
seems  to  need  no  further  demonstration  that  the  price  of  it,  namely 
Wage,  Avill  always  be  less  than  tliat  of  product,  and  thus  allow  the 
employer  an  interest.  This  is,  in  general  terms  and  in  a more  dis- 
passionate way,  the  Socialist  answer.  But,  while  admitting,  as  we 
very  well  may,  that  there  is  enough  and  to  spare  of  exploitation  in 
profit  generally,  the  question  is  by  no  means  so  simple  as  Socialist 
theory  would  have  it.  If  there  is  force  on  the  one  side  there  are 
certain  forces  which  work  steadily  on  the  other.  The  Trade  Unions 
give  the  labourers  a certain  power  of  waiting,  and  tend  to  force 
employers,  as  a class,  to  give  up  at  least  that  portion  of  profit  which 
is  pure  exploitation.  Yet  wage  would  not  be  explained  if  it  were 
shown  to  be,  in  many  cases,  the  exploitation  of  profit ! The  inter- 
competition of  capitalists,  again,  has  surely  been  effective  enough 
of  late  decades  to  force  the  remuneration  of  capital  towards  an 
economic — as  distinguished  from  an  exploitation — level.  If  there 
is  no  economic  level  of  interest,  why  has  it  not  been  wiped  out  of 
existence  altogether  ? The  argument  is  one  that  Socialism  itself 
often  uses ; that,  in  some  respects,  the  dependence  of  capital  is  as 
absolute  as  that  of  labour.  It  is  necessary  even  for  the  siaius 
quo  of  wealth  that  the  capitalist  should  bury  his  surplus  in  the 
fertile  womb  of  earth,  or  in  the  living  powers  of  man. 

But  in  the  present  state  of  economic  development  there  is  no 
question  of  mere  preservation  of  wealth — Jiere  can  scarcely  be, 
so  long  as  the  seed  sown  returns  some  thirty,  some  fifty,  some 
a hundred  fold.  The  motive  of  the  capitalist  undertaker  is 
certainly  not  preservation  but  increase.  He  changes  his  wealth 
into  means  of  production  in  order  that  the  value  of  the  products 
should  be  more  than  the  value  of  the  costs.  He  is  warranted  by 
experience  in  assuming  that,  at  the  worst,  the  price  realised  will 
contain  a certain  minimum  rate  of  interest ; will,  most  probably, 
contain  also  a good  wage  for  himself  as  master  workman  ; and  that. 


TRANSLATOR’S  PREFACE 


XV 


possibly,  a happy  conjuncture  may  give  him  a “ profit  ” besides.  (Of 
course  I am  speaking  of  the  enlightened  employer  who  knows  that 
“ wage,”  tech^cally,  is  remuneration  for  work  done,  and  does  not 
claim  as  wage  more  than,  say,  the  remuneration  of  a Prime  Minister.) 
Where  the  employer  and  the  capitalist  are  separate  entities — as 
they  always  are  to  economic  consideration — the  motives  also  are 
distinct : the  motive  of  the  employer  is  wage  and  “ profit  ” — using 
that  ambiguous  word  in  the  loose  meaning  of  gain  beyond  wage  of 
superintendence  and  pure  interest  — while  that  of  the  capitalist 
is  interest — with  perhaps  a chance  of  “profit.”  Now,  as  thus 
separated,  the  competition  of  capitals  with  each  other  becomes 
more  intense;  for  capital  becomes  a suppliant,  not  only  to  the 
labourer  who  demands  the  minimum  wage,  but  to  the  class  of 
employers  who  expect  a perhaps  extravagant  “ wage  of  superintend- 
ence,” and  a “profit”  besides.  In  this  state  of  sharpened  competi- 
tion the  insufficiency  of  the  exploitation  theory  becomes  manifest 
to  experience.  We  are  forced  to  see  that  there  is  a level  of  interest 
which  no  amount  of  competition  normally  levels  away,  and  we 
conclude  that  this  is  the  economic  level.  Where  the  inter-competi- 
tion of  capitals  is  the  fiercest,  the  owner  of  wealth  has  not  to 
content  himself  with  the  mere  preservation  and  re-creation  of  his 
wealth — much  less  pay  a premium  to  labour  for  keeping  it — but 
gets  his  minimum  2f%  or  3%  of  interest. 

This  explanation  will  be  found  if  we  turn  from  the  question  as 
between  labourers  and  employers^  and  consider  the  larger  question 
as  between  owners  of  present  goods  on  the  one  side,  and  labourers 
and  employers  alike  on  the  other.  And  here  we  come  to  Bbhm- 
Bawerk’s  enunciation  of  a proposition  which  seems  to  me  one  of 
the  most  important  in  modern  economics.  It  is  that  the  supply 
of  _preseut  .goods,  available  in  any  community  either  as  means 
of  production  to  labourers  or  as  subsistence  to  mere  borrowers  for 
consumption,  is  the  sum  of  that  community’s  existing  wealth 
exclusive  of  land.  No  one  nowadays  hoards  wealth,  drawing  on  it 
as  needed.  Thanks  to  banking  systems  and  facilities  for  invest- 
ment, nearly  all  wealth  that  is  not  actually  being  consumed  by  the 
owners  is  made  available  to  supply  this  double  demand.  Disre- 
garding as  before  the  demand  for  consumption,  the  effect  of  which 
is  merely  to  lessen  the  amount  of  wealth  available  for  productive 
borrowers — and  remembering  in  passing  that  the  agio  on  present 
goods  is  the  joint  result  of  these  two  collateral  demands,  we  find 
this  wealth  confronting  the  demand  of  labour,  transmitted  through 
the  employer^  for  the  means  of  subsistence  during  the  production 
period.  Now,  thanks  to  well-known  motives,  wealth  in  normal 
circumstances  increases  faster  than  population.  As  it  accumulates 
it  becomes  possible  for  the  labourers  to  extejid^  their  processes. 
Seed-time  and  harvest  become  separated,  not  by  months  but  by 


XVI 


TRANSLATOR'S  PREFACE 


years,  aud  the  amount  of  wealth  in  a community,  as  enabling  labour 
to  bridge  over  the  long  time  of  growth,  becomes  visibly^  the  con- 
dition  of  its  average  production  period,  and  so  of  its  average  pro- 
ductiveness. Thus  to  him  that  hath  much  muclT  is  given : the 
fich  nation  is  the  heir  of  the  economic  promises. 

From  this  it  is  not  diflScult  to  see  that  the  value  of  means  of 
production  must  always  lag  behind  that  .of  finished  products.  There 
is  always  a demand  for  ampler  means  of  living,  and  the  condition 
of  obtaining  ampler  means  is — time  to  extend  the  production  pro- 
cess. So  long,  then,  as  the  wants  of  spiritual  beings  call  for  fuller 
and  finer  satisfactions,  and  so  long  as  the  working  life  rises  to 
higher  levels,  so  long  .wilLdhere  hn  a premium  put  on  the  present 
wealth  which  makes  more  ample  wealth  possible.  Thus  we  are 
justified  in  saying  that  t^e  demand  for  means  of  production  will 
always  be  greater  than  the  supply,  and  interest,  as  the  agio  on  such, 
will  appear,  in  the  price  of  products. 

The  superficial  resemblance  of  this  ^i^sistence  Fund  to  the 
generally  discredited  Wage  Fund  of  the  classical  economists  will 
not  mislead  any  one  who  enters  into  the  heart  of  Bohm-Bawerk’s 
theory.  The  difference  between  the  two  will  be  found  in  the  few 
pregnant  sentences  on  pp.  419,  420.  In  case  of  misunderstand- 
ing, however,  two  cautions  may  be  given  here.  One  is  that  by 
“ means  of  .subsistence  ” must  be  understood,  not  simply  food,  nor 
even  the  common  necessaries  and  comforts  of  life,  but  alljtha.h  goes 
to  the  maintenance  of  the  workers,  whatever  their  various  levels  of 
comfort  It  is  not  a certain  wage  fund,  provided  arbitrarily  by 
capitalist  employers,  that  is  available  for  the  simple  “ subsistence  ” 
of  the  working  classes : it  is  the  entire  wealth  of  the  community 
that  is  available  for  the  maintenance  of  all  classes  of  workers.  The 
caution  is  much  needed  quite  outside  of  this  connection.  I am 
persuaded  that  many  people  think  they  have  determined  the 
“ cost  ” and  due  reward  of  labour  when  they  have  found  how  many 
weekly  wages  of  20s.  are  contained  in  the  community’s  stock  of 
wealth.  The  mischief  that  this  idea  does,  in  making  people  think 
that  a rise  of  wages  is  a social  calamity,  is,  to  my  mind,  very  great. 
To  economic  consideration,  however,  the  line  is  a vanishing  one 
which  divides  Hodge’s  beer  and  bacon  from  Plugson’s  venison  and 
champagne.  Rightly  considered,  the  prices  of  books,  the  stipends 
of  clergymen  and  teachers,  the  seats  at  theatres  and  concerts  are 
“expenses  of  subsistence,”  just  as  much  as  the  labourers’  bread  and 
cheese — unless  we  are  to  limit  the  category  of  “workers”  to  the 
20s.  a week  class. 

The  oth^r  caution  is  that  this  wealth  available  for  subsistence 
does  not  consist  exclusively  of  goods  already  in  the  finished  state. 
To  put  all  wealth  into  this  form,  indeed,  would  be  the  greatest 
possible  waste.  What  is  required  is,  that  the  various  means  of 


TRANSLATOR’S  PREFACE 


xvu 


subsistence  should  be  ready  when  wanted,  and  this  involves  that, 
at  any  given  time,  the  wealth  of  a country  consists  of  products  at  all 
stages  of  maturity.  To  put  it  concretely  : — At  this  moment  the 
wdieat'is'beln^own  that  will  feed  human  beings  after  next  harvest, 
while  the  sapling  is  being  planted  that  will  not  come  to  its  full 
growth  for  a century  to  come  : at  the  same  moment,  perhaps,  the 
oak  is  being  felled  that  began  its  growth  a hundred  years  ago,  and 
to-morrow  the  wood  of  it  will  enter  into  the  framework  of  a thresh- 
ing-machine which  will  extend  its  life-work  over  a score  of  harvests  : 
sapling  and  tree,  machine  and  wheat,  are  alike  parts  of  that  wealth 
Avhich  is  available  for  the  labourers’  demand  in  its  continuity. 

Eemembering  these  cautions  we  can  see  the  full  import  of,  this 
conception.  It  defines  the  true  relation  of  wealth  to  labour  in 
the  following  terms  : The  function  of  existing  wealth  is  to  subsist 
the  \yorkers  during  the  interval  between  the  beginning  and  the 
end  of  the  social  production  period.  This  strikes  us  as  strange 
mainly  because  oE  fhe'bourgedis  idea  that  wealth  is  the  end  and 
goal  of  labour,  and  the  more  vicious  idea  that  labour  is  a tax  on 
life.  For  certain  purposes  of  economic  study  we  may  think  of 
labour  as  the  means,  and  consumption  wealth  as  the  end  of  pro- 
duction, but  the  economist  falls  into  error  whenever  he  forgets  that 
economic  life  is  an  endless  circle,  where  wealth,  as  subsistence, 
passes  into  muscle  and  brain,  and  muscle  and  brain  pass  into  wealth 
again.  Even  when  we  rise — as  the  economist  may  do — to  wider 
conceptions,  and  point  to  man's  full  free  life  as  the  goal  of  economic 
effort,  we  ought  to  recognise  that  the  working  life  which,  we  lead, 
and  should  lead,  is  at  once  an, end,  and  a. mean.  In  working  we 
live,  and  in  working  we  produce  wealth  : this  wealth,  again,  permits 
of  freer  work  and  fuller  life.  In  correspondence  with  this,  the  type 
of  labourer  is  not  the  man  who  produces  on  one  day  to  consume 
on  the  next,  but  the  man  who  consumes  during  his  work  day — who 
consumes  while  he  produces — and,  moreover,  whose  consumption 
increases  with  his  production.  The  function  of  Avealth,  then,  we 
say,  is  to  support  this  Avorking  life,  with  its  increasing  claims, 
during  its  Avork.  Thus  instead  of  making  Avealth  the  final  cause 
of  industry — as  the  economist  in  virtue  of  his  professional  bias  is 
apt  to  do — or  making  it  the  beginning  and  limit  of  industry — as 
the  Wage  Fund  theory  tended  to  do — this  conception  places  Avealth 
in  the  centre  as  the  maintenance  of  the  working  world  during  its 
rise_to  higher  and  higher  levels  of  jvorking  life.  In  other  words, 
it  puts  the  economic  conception  into  line  Avith  the  moral  by  making 
Avealth  simply  the  mean  to  the  Avorking  life. 

If,  then,  interest  is  so  purely  a natural  phenomenon,  Avhy  has  it 
met  with  so  much  covert  dislike,  and  so  much  scientific  opposition? 
There  are  at  least  three  reasons.  First,  the  element  on  Avhich  all 
interest  is  based,  namely  time,  has  come  to  be  a peculiarly  important 


Kviii  TRANSLA  TOR'S  PREFA  CE 

fa^lQr  in  modern  production.  All  things  come  to  him  who  waits, 
and,  in  economic  life,  this  describes  the  capitalist.  But  this  fact 
involves  that  the  labouring  classes  who  cannot  wait,  and  cannot 
compete  ^vith  the  productiveness  of  lengthy  processes,  are  put  in  a 
position  of  peculiar  dependence : hence  the  possibility  of  exploitation 
of  wage,  of  usurious  rates  of  interest,  of  unjust  rents.  Second,  from 
a moral  point  of  view,  there  is  much  that  is  objectionable  in  the  fact 
that  interest  allows  certain  classes  to  live  without  working  and  to 
make^Eis  possibility  hereditary  in  their  families.  JThird,  in  this  in- 
come there  is  no  ratio  between  gain  and  desert.  Those  who  have  little 
must  accept  Savings  Bank  interest  for  their  hard-earned  shillings ; 
those  who  have  much  have  all  the  chances  of  bonds,  mortgages, 
joint-stock  investments  and  the  like.  All  the  same,  so  long  as  men 
do  put  a different  valuation  on  present  and  future  .goods,  interest 
cannot  be  prevented.  Even  a Socialist  state  could  not  prevent  it : if 
b^'^rc^ible  means  it  were  stopped  between  individuals,  it  would  still 
obtain  between  commune  and  labourer.  The  state  in  this  case  would 
replace  the  capitalist,  and  “ exploit  ” the  worker  in  the  same  way — 
although,  it  may  be  hoped,  with  a clearer  view  to  the  wellbeing  of 
the  exploited — but  no  organisation  could  make  interest  into  wage. 

In  Book  VII.  Dr.  Bohm-Bawerk  passes  to  the  most  difficult 
part  of  the  subject,  the  Bate  of  Interest.  Here,  however,  we 
shall  find  him  using  terms  which  are*  scarcely  intelligible  without 
some  knowledge  of  the  theory  of  value  enunciated  by  Jevons  and 
Menger,  and  now  held  practically  as  the  fundamental  doctrine  of 
the  Austrian  school.  The  formulation  of  this  theory,  so  far  as 
was  necessary  to  the  theory  of  capital,  occupies  Books  III.  and  IV. 
of  the  present  work.  It  is  not  possible,  unfortunately,  in  the 
short  space  at  my  disposal,  to  give  anything  like  an  easy  account 
of  this  theory.  I have  already  found  difficulty  enough  in  putting 
it  into  the  compass  of  my  own  Introduction  to  the  Theory  of  Value, 
and  all  I can  hope  to  do  here  is,  perhaps,  to  assist  the  reader  who 
finds  any  difficulty  in  the  text. 

The  essential  points  are  as  follows.  Value  is  altogether  based 
on  utility,  and  the  amount  of  value  is  determined,  not  by  average, 
but  by  final  or  marginal  utility.  The  subjective  value  of  a good,  as 
distinguished  from  its  utility,  lies  in  its  being  the  indispensable 
condition  of  some  satisfaction  of  want : the  ammnt  of  value  it 
obtains  is  determined  by  the  last  use  to  which  it,  or  a similar  good 
of  the  stock,  is  put  in  the  then  circumstances  of  want  and  provi- 
sion for  want.  Thus  the  utility  of  a bushel  of  corn  is  given  it 
by  its  power  of  supporting  life  : its  value  comes  from  the  fact 
that  it  is  so  limited  that  some  human  want  depends  on  it  for  satis- 
faction : the  amount  of  its  value  is  determined  by  the  least  use 
to  which  the  bushel  is  economically  put  in  the  circumstances  of 
the  consumers  on  the  one  hand  and  the  amount  of  the  harvest  on 


TRANSLATOR'S  PREFACE 


XIX 


the  other.  Thus  value  has  no  absolute  level ; it  is  neither  intrinsic 
nor  relative  to  any  personal  or  material  average  : it  is  always  found 
in  the  relation  of  these  two  determinants  of  Want  and  Provision. 

Price,  or  Exchange  Yalue,  again,  is  a superstructure  on  this 
subjective  value,  determined  by  Jhe  competition  of  buyers  and 
sellers  with  each  othermid  among  themselves.  Under  a simple 
barter  system  each  party  in  a market  would  put  a subjective  value 
on  the  goods  changing  hands,  as  having  a direct  bearing  on  his  ovti 
wellbeing,  and  would  base  the  amounts  offered  and  asked  on  this 
valiiation.  With  organised  industry  comes  the  money  valuation, 
where  the  comparative  use  value  of  goods  to  people  generally 
becomes  reflected  on  a money  scale,  and  it  becomes  more  definite 
and  intelligible  to  say  a thing  is  worth  so  many  shillings  than  to 
say  it  is  worth  so  many  other  things  which  admit  of  direct  valua- 
tion in  terms  of  satisfaction  of  want.  Buyers  and  sellers,  then, 
come  together  in  markets  with  a definite  valuation  in  their  minds 
of  what  the  goods  or  the  money  is  Avorth  to  them.  Thanks 
to  the  differences  in  subjective  scales,  it  is  the  interest  of  both 
parties,  and  it  is  possible  for  both  parties,  to  get  an  advantage  by 
the  exchange,  although  their  interests  diverge  in  regard  to  the 
amount  of  advantage  that  each  may  get.  In  this  competition  the 
goods  pass  from  the  “most  capable”  sellers  to  the  “most  capable” 
buyers,  and  the  price  is  fixed  between  the  valuations  of  the  two 
“marginal  pairs,”  viz.  the  last  buyer  and  seller  and  the  first  un- 
successful buyer  and^  seller.  The  level,  again,  of  these  marginal 
pairs  is  determined  by  the  relation  of  the  wants  of  both  parties  to 
their  economical  provision.  It  must  be  added  that,  in  an  organised 
economy,  “utility”  becomes  a more  complex  conception.  In  the 
case  of  a manufacturer  the  utility  of  raw  material  is  not  the  personal 
uses  to  which  he  can  put  his  own  products,  but  the  uses  to  Avhich 
he,  as  a manufacturer,  can  put  the  raw  material,  and  these,  again, 
are  determined  by  the  wants  of  his  customers.  The  direct  use  of  a 
good  is  here  replaced  by  the  employment  of  the  good,  and  the  “ most 
useful  ” is  translated  into  the  “ best  paying,”  or  “ most  remunerative.” 
And  this  emergence  of  the  professional  producer,  who  makes  for 
the  market  and  to  whom  his  produce  has  really  no  subjective  value, 
simplifies  the  calculation  of  the  marginal  pairs  by  eliminating 
the  subjective  valuations  of  the  sellers,  and  determines  the  price  at 
the  valuation  of  the  last  buyer. 

This  law_jioes  not,  as  one  would  suppose,  come  into  collision 
with  the  old  law  that  value  is  determined  by  costs  of  production. 
The  Law  of  Costs  is  one  amply  confirmed  by  experience  as  regards 
the  great  mass  of  articles  produced  under  free  competition.  But 
this  empirical  law  was  never  thought  to  determine  the  value 
of  goods  produced  under  any  other  conditions.  The  point  on 
which  it  requires  amending  is  that  it  should  be  expressed  as  a law 


XX 


TRANSLATOR'S  PREFACE 


of  equality  between  costs  and  products.  The  old  theory  not  only 
said  that  the  value  of  goods  tended  to  an  equality  with  that  of 
the  means  of  production,  but  went  on  to  put  the  causal  relation 
exactly  the  wrong  way  about.  As  we  have  said,  it  is  human  want 
gives  value  to  goods  ; and  that  value  is  thrown  back  upon  the 
means  of  production  without  which  the  goods  cannot  come  into 
existence,  and  which  are  really  the  goods  in  a previous  state  of 
existence.  In  developed  economy  it  is  true  that  there  comes  a 
reflex  influence  from  costs  to  products.  If  a group  of  means  of 
production  is  capable  of  making  goods  which  for  the  moment  have 
different  marginal  utilities,  the  value  that  is  transferred  to  the  costs 
is  the  value  of  the  last  or  marginal  product  made  from  these  costs. 
In  time,  no  doubt,  competition  forces  this  value  again  on  to  the 
other  products,  thus  giving  the  impression  that  the  value  comes 
from  the  costs : but  the  fact  is  that  the  very  value  which  these 
costs  have,  came  from  their  product — not,  however,  from  this  or 
that  particular  product,  but  from  the  marginal  one. 

Now  the  immediate  point  of  connection  between  the  theory  of 
value  qnd  the  theory  of  interest  is  that  the  problem  of  interest,  in 
all  its  manifestations,  is  nothing  more  than  a problem  of  price,  the 
commodity  bought  and  sold  being — Present  Goods.  When,  then, 
we  go  on  to  the  final  question,  the  Amount  or  Rate  of  Interest, 
what  we  have  to  remember  is  that  here,  as  in  price  transactions 
generally,  we  have  a resultant  of  subjective  valuations,  and  that  the 
determining  elements  we  have  to  deal  with  are  the  extent  and 
intensity  of  the  subjective  valuations  of  buyers  and  sellers.  We 
have  already  seen  what  is  the  extent  of  this  supply,  and  we  know 
the  motives  which  weigh  with  the  owners  and  determine  its  intensity. 
The  demand,  again,  comes  from  those  who  borrow  to  consume,  and 
those  who  borrow  to  produce.  Of  these  two  co-ordinate  demands 
we  shall,  as  before,  confine  ourselves  to  the  more  important  and  more 
difficult,  and  to  its  most  important  section,  the  Wage-Earners,  refer- 
ring the  reader  to  Bohm-Bawerk’s  last  two  chapters  for  the  other 
sections.  One  way  of  looking  at  this  demand  would  be  to  consider 
it,  not  as  a direct  demand  from  the  wage-earners,  but  as  interpreted 
and  in  certain  definite  ways  modified  by  the  undertakers.  But  it  is 
perhaps  better  to  consider  the  undertaker  as  the  owner  of  capital, 
and  take  the  question  simply  as  one  between  Wage -Earners  and 
Capitalists.  In  the  following  argument,  then,  we  assume  that  the 
demand  comes  exclusively  from  labour,  that  the  entire  supply  and 
demand  meet  in  one  single  market  embracing  the  whole  community, 
and  that  all  branches  of  production  show  the  same  scale  of  surplus 
returns. 

If  wage  were  a fixed  point — say  determined  at  the  subsistence 
level,  as  the  Iron  Law  assumes — the  calculation  of  the  rate  of  in- 
terest would  be  comparatively  easy.  Say  that  every  added  ^100 


TRAN  SLA  TOR'S  FREE  A CE 


XXI 


of  capital  permitted  simply  a further  extension  of  process.  Every 
extension  of  process  assures  an  extra  product.  But  where  capitalist 
industry  is  well  developed,  the  increments  of  product  at  each  exten- 
sion diminish  relatively  to  those  preceding,  and  there  comes  a point 
where  the  increase  of  product  does  not  balance  the  expense  of 
extension.  To  put  it  in  familiar  terms  : an  employer  making  10% 
on  his  own  capital,  and  offered  loans  at  4%,  may  profitably  extend 
his  business  by  borrowing  although  at  every  extension  he  makes  a 
smaller  profit.  But  when  the  extension  made  possible  by  the  last  loan 
returns  him  only  4%^  there  is  no  inducement  to  extend  further.  In 
this  case  the  rate  of  interest  would  be  determined  by  the  “ last  dose 
of  capital  ” economically  applied,  to  use  Thiinen’s  phrase. 

But  the  great  difficulty  is  that  wage  is  not  a fixed  amount. 
The  value  of  labour  to  the  employer  depends  upon  anticipated  pro- 
duct, and  that  product  depends  on  productiveness,  and  productive- 
ness depends  on  length  of  process,  and  thus  we  have  no  fixed  point 
from  which  to  start.  Bohm-Bawerk’s  solution  is  the  following.  The 
fixed  point  which  we  cannot  get  in  wage  is  got  in  another  way. 
As_in  the  theory  of  money  it  is  well  known_  that  any  quantity  of 
currency,  small  or  gre^  will  efifect  the  necessary  exchanges,  so  here 
the  available  quantity  of  present  goods  offered  for  sale  will  buy  up 
the  whole  of  the  available  labour.  This  is  due  to  the  circumstances 
alriady  spoken  of — the  need  of  the  labourers  to  hire  themselves  out, 
and  of  the  capitalists  to  hire  out  their  wealth.  The  few  cases  of 
unemployed  labour  and  capital  may  be  left  out  of  account,  as, 
obviously,  it  is  only  because  of  bad  organisation  that  there  are  such. 
When  the  proportion  of  wealth  and  of  labourers  changes,  all  that 
is  required  is  to  contract  or  extend  the  production  period.  Granted 
this  assumption,  then, — that  at  any  moment  labour  buys  up  the 
available  “ wage  fund,” — the  rate  of  interest  is  determined  on  the 
ordinary  lines  of  the  formation  of  price.  The  period  will  be  extended 
till  such  time  as  the  marginal  employment  of  the  unit  of  capital  is 
reached ; that  is,  till  the  extra  product  gained  by  extension  of  process 
is  outweighed  bv  tFe  .diiuinishing  productiveness  of  the  process. 

To  put  this  difficult  argument  in  a way  perhaps  more  easy  to 
grasp.  Say  that  at  any  given  moment  there  is  a certain  amount  of 
wealth  divided  out  among  the  wage-earners  as  subsistence.  In  any 
case  there  will  be  some  agio  on  this  wealth,  and  there  will  be  an 
average  production  period.  If  now  wealth  increases  faster  than 
population — in  Great  Britain  it  increases  more  than  twice  as  fast — 
there  must  be  some  disturbance  of  the  equilibrium  at  present  estab- 
lished. The  new  wealth  will  seek  for  employment,  and  find  it — 
not,  of  course,  in  offering  higher  wages,  for  there  is  still  nothing  in 
increased  wealth  to  increase  product — but  in  extending  processes. 
But  as,  presumably,  we  have  now  entered  the  stage  of  progress 
where  extension  of  period  gives  decreasing  surpluses,  the  return  to 


a 


XXll 


TRANSLATOR’S  PREFACE 


this  last  employment  of  wealth  will  be  less  than  before.  This 
marginal  employment  will  bring  down  interest  generally:  the  rate 
will  be  determined  by  the  last  extension  of  the  production  period  : 
wage  will  rise  relatively  to  interest : and  the  equilibrium  be  found 
at  a new  level.  If  population  increase,  wealth  and  productiveness 
remaining  constant,  the  converse  will  be  the  case  : wage  will  fall 
and  interest  rise  because  the  community  is  brought  back  to  a pro- 
duction period  where  the  absolute  product  is  less,  but  the  relative 
surplus,  due  to  extension  of  process,  is  greater.  If,  lastly,  product- 
iveness increase,  wealth  and  population  remaining  constant,  the 
same  phenomenon  will  take  place,  owing  to  the  decreasing  progres- 
sion of  surplus  returns  being  for  the  moment  checked, 
y Thus  we  can  see  that  the  three  concrete  factors  which  determine 
/ t^  marginal. extension  of  process,  and  thereby  the  rate  of  interest, 
are  the  amount  of  the  national  Subsistence  Fund,  the  numbers  of 
the  working  Population  provided  for,  and  the  degree  of  Productive- 
ness reached  in  the  industrial  development.  To  quote  our  author’s 
words,  “ interest  will  be  high  in  proportion  as  the  national  subsist- 
ence fund  is  low,  as  the  number  of  labourers  employed  by  the  same 
is  great,  and  as  the  surplus  returns  connected  with  any  further 
extension  of  the  production  period  continue  high,  and  vice  versA.” 

All  this  is  in  perfect  harmony  with  the  known  facts  of  interest. 
It  explains  how  as  a country  grows  wealthy  the  rate  of  interest  falls 
while  wages  rise ; how  an  increase  of  population  without  a corre- 
sponding increase  of  wealth  has  a tendency  to  raise  the  rate  of 
interest  and  depress  wages  •,  and,  finally,  how  inventions  which 
increase  productiveness  tend  to  raise  the  rate. 

It  is  not  within  the  scope  of  my  task  here  to  follow  Bohm- 
Bawerk  in  gradually  adding  on  the  other  elements  required  to  make 
the  picture  true  to  the  actualities  of  life,  and  to  show  that  they 
make  no  material  change  in  the  principles  laid  down.  Enough  has 
been  said  to  give  the  outlines  of  a theory  which  challenges  attention, 
both  by  the  originality  of  its  ideas,  and  the  thoroughness  of  its 
treatment. 

My  thanks  are  due,  first  of  all,  to  Dr.  Bohm  Bawerk,  who  has 
materially  added  to  the  value  of  this  rendering  of  his  work  by 
giving  it  the  stamp  of  his  revision  ; to  Professor  Edward  Caird,  of 
Glasgow,  and  Professor  M'Cormick,  of  Dundee,  for  many  valuable 
suggestions  and  corrections  : to  Miss  Christian  Brown,  of  Paisley, 
who  has  again  put  me  under  heavy  obligation  by  most  carefully 
revising  my  proof-sheets  : and  to  two  other  of  my  students  who 
have  spared  me  many  weeks  of  thankless  work  by  deciphering  and 
rewriting  my  crabbed  MS. 


Glasgow,  June  1891. 


AUTHOE’S  PREFACE 


It  has  taken  me  longer  than  I expected  to  foUow  up  the 
publication  of  my  Geschichte  und  Kritik  der  Kapitalzins-Theorieen 
by  the  present  work.  The  heavy  part  of  The  Positive  Theory  \ 
of  Capital  hes  in  the  theory  of  Interest.  In  the  other  portions ! 
of  the  subject  I was  able,  at  least  on  the  whole,  to  follow  in 
the  footsteps  of  previous  theorists,  but  for  the  phenomena  of 
interest  I had  to  put  forward  an  explanation  which  breaks 
entirely  new  ground. 

I make  this  latter  statement  with  some  confidence.  It  is ' 
quite  true  that  mv  explanation  of  interest  rests  on  certain 
important  idens  previously  put  forward  by  Jevons.  But 
Jevons  did  not  give  them  that  special  application  which  might 
have  made  them  serviceable  towards  the  explanation  of  interest 
— if  they  had  been  taken  in  connection  with  certain  other 
lines  of  thought  not  then  familiar  to  Jevons.  Thus  it  is  that, 
in  his  interest  theory,  Jevons  remained  under  the  spell  of  the 
old  classical  opinions-,  notwithstanding  these  new  lights  which 
came  to  him  from  another  quarter  and  were  applied  to  other 
ends.  And,  moreover,  as  the  ideas  common  to  both  of  us  were 
not  borrowed  by  me  from  Jevons.  but  discovered  in  entire 
independence — indeed  long  before  I became  acquainted  with 
Jevons’s  writings — I feel  bound  to  take  on  myself,  for  good  or 
ill  as  events  may  prove,  the  entire  and  imdivided  responsibility 
for  the  interest  theory  now  put  forward. 

As  regards  the  way  in  which  I have  treated  the  subject, 
I may  be  allowed  to  make  two  remarks. 

The  method  of  statement  adopted  for  the  most  part 
throughout  this  book  is  that  which  ^^pnople— generally — not 
without  a suspicion  of  passing  judgment  on  it — -caU.  “ abstract.” 


XXIV 


AUTHOR’S  PREFACE 


All  the  same  I contend  that  my  theory  does  not  contain  one 
single  feature  which  is  not  based  on  true  empirical  principles. 
There  are  various  wavs  of  being  empirical.  We  may  obtain 
the  facts  of  experience  which  serve  us  as  foundations  from 
economic  history,  or  we  maj'’  gather  them  from  statistics^  or  we 
may  try  to  get  them  directly  in  our  common  daily  life  by 
simple  informal  observation.  No  one  of  these  three  methods 
has  any  monopoly : each  of  them  has  its  separate  and  peculiar 
sphere.  In  the  nature  of  things  the  historical  and  the  statis- 
tical method  treat  the  matter  of  experience  in  much  ampler 
fashion,  and  gather  it  from  wider  fields  of  observation  ; but  for 
that  very  reason  they  fail,  oir  the  whole,  to  seize  any  but  tbn, 
larger  and  more  apparent  facts : they  put  economic  events,  as 
it  were,  through  a large  sieve,  where  a great  many  dehcate 
and  unobtrusive,  but,  perhaps,  more  essential  features  of 
economic  life,  escape  unnoticed.  If,  then,  we  would  rescue 
these  and  make  them  objects  of  economic  investigation — 
and  for  very  many  scientific  problems  we  simply  cannot  do 
without  taking  cognisance  of  tmem — there  is  nothing  for  it 
but  to  have  recourse  to  the  ci^rrriparatively  narrow  but  alwa^ 

impressive  personal  observation  of  life. 

Now  I have  endeavoui'ed  to  make  full  use  of  all  three 
methods  of  investigation.  What  help  economic  history  and 
statistics  could’affbrd  me  in  my  task  I have  thankfully  accepted 
and  conscientiously  made  the  most  of,  even  where  I have  not 
explicitly  mentioned  the  original  materials  with  which  I 
worked.  But  the  matter  thus  obtained  was  not  by  a long 
way  sufficient  for  my  purposes.  The  theory  of  capital  has  to 
reckon  with  a number  of  facts  which  history  and  statistics 
have  not  recorded,  partly  because  in  their  nature  they  could  not, 
partly  because  attention  has  not  hitherto  been  drawn  to  the 
importance  of  these  facts.  T\"hat,  for  instance,  could  history 
and  statistics  say  about  the  question  which  is  so  important  in 
the  explanation  of  interest,  as.,  to  whether  there  is  in  perishable. 

’ ■ " T . 1 r-ing  nsp.  ? How  much,  again,  could 


actual  grounds  on  which  are  based 


the  different  subjective  estimates  of  present  and  future  goods  ? 
Or  what  have  we  learned — up  till  the  present  at  least — as 
to  the  relation  between  the  amount  of  the  national  subsistence. 
fund  arirj  tVip  avprage  production  period  in  a commmiitY  ? In 


AUTHOR'S  PREFACE 


XXV 


matters  like  these  one  is  obliged,  for  good  or  ill,  to  turn  to 
other  sources  of  information,  and  other  paths  of  knowledge 
than  those  of  history  and  statistics. 

And  if  proof  be  needed  that  I was  ri^ht  in  doing  so,  and 

that  indeed  it  was  impossible  for  me  to  do  otherwise,  I may 
appeal  to  witnesses  whose  authority,  as  regards  this  question, 
is  beyond  dispute,  nameiy,  the  leaders  and  adherents  of  the 
“ historical  school  ” itself.  For  full  thirty  years  the  historical 
and  statistical  tendency  has  been  the  prevailing  one  in  German 
economics.  During  the  whole  of  this  long  period  there  has 
not  been  even  an  attempt  to  solve  the  great  problem  of  interest 

by  the  tools  of  the  historical  method,  although  this  problem 
has  always  occupied  a front  place  in  economical  discussion. 
Perhaps  the  nearest  attempt  to  a really  historical  treatment 
was  that  of  Eodbertus,  with  his  famous  statement  of  the 
different  forms  imder  which,  in  various  ages,  the  ruling  econ- 
oTnie  elaggeg  have  always  drawn  the  better  pa.rt  of  the  product 

of  the  nation’s  labour  to  themselves,  But,  accurately  speaking, 
Eodbertus,  in  these  historic  flights,  aimed  only  at  winning  assent 
to  his  exploitation  theory,  while  the  characteristic  feature  of 
that  theory  is  that  it  makes  use  from  end  to  end  of  the  abstract- 
deductive  machinery  of  the  classical  school,  the  labour  theory  of 
Eicardo.  Or  to  mention  only  the  recognised  leaders  of  the  - 
historical  school  \ — Eoscher  has  put  together  his  interest  theory 
out  of  elements  taken  partly  from  J.  B.  Say,  partly  from  Senior 
— -that  is  to  say,  altogether  from  “ pre-historic  ” theory  ; while 
Knies,  following  Hermann,  invents  a theory  of  the  “ use  ” of 
goods,  which  not  only  has  nothing  in  the  world  in  common 
with  history  and  statistics,  but,  as  I at  least  believe,  dispenses 
with  any  inductive  foundation  whatever,  and  is  the  result  of 
simple  speculation — and  not  even  happy  speculation. 

If,  then,  the  historical  economists  themselveSj  when  brought 
face  to  face  with  the  problem  of  capital,  have  not  trusted  to 
their  peculiar  method,  and  have  taken  to  a kind  of  investigation 
generally  foreign  to  them,  J cannot  he  reproached  if  I take  the 
same  course  as  they  do.  I am  free — at  least  I try  to  be  free 
— from  any  onesidedness  of  method.  In  my  opinion  there  is 
no  one  royal  road  of  investigation : to  my  mind  that  way  is 
good  which  leads  to  the  goal  of  knowledge  in  the  individual 
case.  And  sometimes  that  will  be  the  one,  sometimes  the 

c 


XXVI 


AUTHOR'S  PREFACE 


other  method,  according  to  the  different  nature  of  the  individual 
problems  that  present  themselves.  In  the  present  case  I 
imagine  that  I have  employed  the  method  of  research  which  was 
most  suitable  to  the  special  nature  of  the  theoretical  problems 
~'~~X)f~-capital — abstract  in  form,  but  empirical  in  essence : and 
indeed,  as  seems  to  me,  empirical  in  a truer  sense  than  can  be 
assigned  to  the  investigations  which  the  historical  school  has 
directed  towards  the  same  end. 

The  second  remark  I should  like  to  make  is  this.  The 
fundamental  ideas  of  my  interest  theory-are.  I believe,  unusually 
simple  and  natural  Had  I been  content  to  arrange  these  ideas 
in  a more  concise  form,  avoiding  all  casuistical  matters  of  detail, 
I should  have  put  forward  a theory  which,  in  small  compass, 
would  have  produced  the  impression  of  being  exceedingly  simple, 
even  verging  on  being  self-evident.  So  far  as  power  of  carrying 
conviction  goes,  this  would  certainly  have  been  an  advantage, 
and,  if  I have  forborne  to  seize  that  advantage,  it  was  only  after 
full  consideration.  The  fac; 
have  been  so  man 
found  fake,  that  I must  expect  to  find  the  public  very  critically 
disposed,  and  indeed  must  presume  that  my  best  and  most 
careful  readers  will  be  the  most  critical.  In  these  circum- 
stances it  appeared  to  me  morp.  importaTit  tn  make  the  structure 
of  my  theory  secure  than  to  make  it  easy  and  pleasant  reading. 
Thus  I decided  to  encumber  my  work  with  numerous  demon- 
strations, details,  exact  figures,  and  so  on,  rather  than  leave 
room  at  critical  points  for  doubts  and  misunderstandings. 

In  this  direction  one  circumstance  gave  me  particular  trouble. 
In  a theory  of  any  range  and  any  difficulty  f.ViprP  arp  ppintf  which, 
by  reason  of  some  casuistical  pecuharities  or  other,  are  not 
always  qnihp  pasily  pxplainpd.  even  when  the  general  principle 
which  will  give  their  solution  is  already  known ; and,  so  long 
as  those  points  are  not  distinctly  traced  back  to  the  general 
principle,  they  stand  like  so  many  living  objections  to  its 
correctness.  As  it  happens,  there  are  a good  many  such  points 
in  thp  <'wf>  r.bpnrips  so  cinselv  connected ; — that  of  valufe-and 
that  of  capital.  Now  in  the  theory  of  value  I had  experienced 
how  unexplained  questions  of  this  sort  may  stand  seriously  in 
the  way  and  hinder  the  acceptance  of  the  best  grounded  general 
theories, — for  I am  convinced  that  people  have  been  so  long 


AUTHOR'S  PREFACE 


xxvii 


prevented  from  getting  right  views  on  the  nature  and  laws 

of  value  only  because  they  stnmhled  at  certain  striking  facts, 
which,  to  hasty  consideration,  seemed  to  contradict  these  views, 
while  in  truth  they  were  only  complicated  cases  requiring 
casuistical  treatment.  To  save  my  theory  q, 

like  fate  T tried  tmt.i'mpafp,  nhjp.ctions  of  this  sort,  and 
remove  them  by  suitable  digressions.  Naturally  I did  not 
deal  with  all  conceivable  objections,  but  only  with  those  which 
seemed  to  me  likely  to  crop  up  in  the  minds  of  critical  readers, 
and  which,  at  the  same  time,  seemed  difficult  enough  to  warrant 
a special  explanation : all  the  same  it  gave  me  occasion  to  go 
into  more  detail  than  was  favourable  to  the  fluent  statement 
of  mv  theory. 

Thanks  to  all  this  I have  arrived  at  a result  as  paradoxical 
as  it  is  natural ; that  the  very  trouble  wtnVh  T took  to  clear 
difficulties  out  of  the  wav  has  given  my  theory  a certain 

appearance  of  difficulty..  Unsuspicious  of  these  hidden  and 
dangerous  rocks,  many  of  my  readers,  I doubt  not,  would  have 
sailed  safely  over  them,  wliile  I,  knowing  them  so  well,  and 
trying  to  steer  a safe  but  laboured  course,  have  made  the 
journey  long,  difficult,  and  troublesome.  I trust,  however,  that 
somethmg  may  be  put  to  my  credit  in  this  regard ; for,  after 
all,  no  one  could  very  well  expect  to  arrive  at  the  solution  of 
a problem  of  such  recognised  difficulty  except  through  earnest 
and  laborious  thinking.  I may  at  any  rate  take  this  oppor- 
tunity of  asking  one  favour  of  my  readers  ; — that,  if  they  have 
once  read  my  theory  with  all  its  ca.suistical  detail,  they  would 
go  over  it  a second  time  omitting  the  detail.  If  in  this  way 
the  leading  ideas  are  put  directly  together  again,  and  cleared 
of  aU  superfluous  elaboration,  I venture  to  think  that  the 
theory  will  again  produce  that  impression  of  simplicity  and 
naturalness  which  is  warranted  by  the  simplicity  of  its  con- 
stituent ideas ; an  impression  which  I may  have  sacrificed  to 
a critical  precaution  that  was  perhaps  exaggerated,  but  was 
not  altogether  without  justification. 

This  book  was  already  well  through  the  press  when  Carl 
Menger’s  Contriimtion  to  the  Theory  of  Capital  appeared  in 
Conrad’s  Jahrhiicher  (vol.  xvii.  part  ii.)  I very  much  regret 
that  it  was  then  too  late  for  me  to  make  full  use  of  that  most 
interesting  and  suggestive  work,  and,  in  particular,  that  I could 


AUTHOR'S  PREFACE 


not  (do  more  justice  to  its  author  in  my  critical  notice  of  the 
historical  development  of  the  conception  of  capital.  Unfortun- 
\ ^ at^  by  the  time  it  appeared  the  first  part  of  my  book, — that 
^ j^nich  deals  with  the  conception  and  nature  of  capital,  and 
touches  most  closely  on  this  work  of  Menger, — was  already 
printed  off. 

For  the  same  reason  I could  not  notice  the  important  work 
of  Wieser  on  Natxiral  Value,  which  only  came  to  my  hands 
during  the  printing  of  my  last  chapter. 

E.  Bohm-Baweek. 


Innsbruck,  November  1888. 


ANALYTICAL  TABLE  OF  CONTENTS 


Introduction.  The  different  sense  attached  to  the  word  Capital  in  the  spheres 
of  Production  and  Distribution.  Division  of  the  subject  into  Capital  the 
instrument  of  production,  and  Capital  the  source  of  interest  pp.  1 — 3 

BOOK  I 

THE  NATURE  AND  CONCEPTION  OE  CAPITAL 

Chapter  I.  Man  and  Nature.  The  unity  of  all  science  demands  that 
economics  builds  on  certain  fundamental  truths  pertaining  rather  to  the 
natural  sciences.  Connection  of  Happiness,  Wants,  Satisfaction,  Goods, 
Use,  Production.  Man’s  contribution  to  production — the  “moving  of 
things  ” — as  deciding  where  and  when  natural  forces  shall  act.  Limitations 
of  our  mastery  over  nature  : our  allies — knowledge,  and  the  division  of 
nature  against  herself.  .......  pp.  7 — 16 

Chapter  n.  The  Nature  of  Capital.  The  roundabout  method  of  pro- 
duction. Illustrations.  Its  great  results  as  regards  product  are  an 

admitted  fact  of  experience.  The  explanation  ; — that  by  getting  control  of 
one  power  we  can  bring  it  to  bear  on  other  powers,  and  through  many 
members  obtain  a cumulative  result.  This  enlisting  of  natural  forces  is 
capitalist  production,  and  capital  is  nothing  but  the  complex  of  inter- 
mediate products  which  emerge  at  the  various  stages  on  the  roundabout 
journey  of  production  .......  pp.  17 — 23 

Chapter  IIL  Historical  Development  of  the  Conception.  Originally 
it  appeared  as  an  interest-bearing  sum  of  money.  Turgot  expanded  this  into 
money  or  goods.  Adam  Smith  divided  goods  into  consumption  goods,  and 
income  - bearing  goods  or  capital,  noticing  a distinction  in  the  latter  which 
was  developed  by  his  followers  into  the  categories  of  National  and  Indi- 
vidual capital.  It  escaped  notice,  however,  that  these  were  two  entirely 
independent  conceptions,  and  hence  the  confused  idea  that  capital  bore 
interest  because  it  was  productive.  Definitions  of  Hermann,  Menger, 


XXX 


ANAL  YTICAL  TABLE  OF  CONTENTS 


Klciuwacliter,  Jevons,  Marx,  Kiiies,  Walras,  M'Leod,  Kiihnast.  Various 
interpretations  of  tlie  terms  “goods  ” and  “means  of  production  ” in  these 
definitions  .........  pp.  24 — 35 

Chapter  IV.  The  True  Conception  of  Capital.  The  principles  of  a good 
definition.  Capital  in  general  .(Acquisitive  or  Private  capital)  is  a group 
of  products  which  serve  as  means  to  the  acquisition  of  goods.  Under  this 
we  put  the  narrower,  hut  perhaps  more  important,  conception  of  Social  or 
Productive  capital,  the  complex  of  intermediate  products,  or  products 
destined  for  further  production  ......  pp.  36 — 41 

Chapter  V.  The  Competing  Conceptions  of  Capital,  (i)  Those  includ- 
ing Consumption  goods  as  well  as  acquisitive  instruments — the  “national 
subsistence  fund,”  Koscher’s ““ products  saved  for  further  production,” 
Knies’s  “goods  applicable  to  the  satisfaction  of  want  in  the  future.”  (2) 
Those  including  Labour  : the  strong  objections  to  this.  (3)  Those  includ- 
ing Land  as  well  as  products  of  labour — a classification  which,  indeed,  has 
some  advantages.  (4)  Those  making  still  stricter  limitations — Klein- 
wiichter,  Marx,  Jevons.  (6)  Metaphysical  conceptions — M'Leod  and 
Kiihnast  ..........  pp.  42 — 60 

Chapter  VI.  Social  and  Private  Capital.  This  division  is  not  coin- 
cident with  that  made  by  Rodbertus  and  Wagner  into  purely  economic 
capital  and  legal  property  in  capital.  The  groups  of  goods  embraced  in 
each  of  our  categories.  Should  “warehoused  consumption  goods”  and 
“money”  be  included  in  social  capital?  Should  the  maintenance  of 
labourei-s  ? Emphatically  this  latter  is  not  capital,  but  consumption 
wealth pp.  61 — 72 


BOOK  II 

CAPITAL  AS  INSTRUMENT  OF  PRODUCTION 

Chapter  I.  Introductory.  The  two  questions  answered  in  the  present 
book  : How  does  capital  originate,  and  what  is  the  natui’e  of  its  work  in 
production  ? The  un.satisfactory  answers  up  till  now  are  principally  due  to 
the  neglect  of  describing  facts  before  explaining  them  . . pp.  75 — 77 

Chapter  II.  Capitalist  Production.  Recapitulation.  The  sole  technical 
factoi-s  in  production  are  nature  and  labour,  but,  as  we  economise  only 
where  we  have  not  superfluity,  the  limited  natural  agents — briefly,  uses  of 
land — and  labour  are  the  sole  economic  factors.  In  capitalist  production 
the  roundabout  way,  while  securing  increased  products,  is  attended  by  the 
sacrifice  of  Time.  This  is  at  the  root  of  the  dependence  of  labour  on 
capital.  Every  lengthening  of  process  involves  some  increase  of  product, 
but  not  in  equal  progression.  The  “production  period”: — the  average 
time  between  the  expenditure  of  uses  of  land  and  labour  and  the  turning 
out  of  the  finished  consumption  good  .....  pp.  78 — 91 


ANALYTICAL  TABLE  OF  CONTENTS 


XXXI 


Chapter  HL  The  Function  of  Capital  in  Production,  (i)  It  is 

symptomatic  of  the  adoption  of  the  roundabout  method.  (2)  As  storing 
up  natural  power  it  is  a tool  to  further  production.  (3)  It  is  an  indirect 
cause  of  new  processes,  as  giving  off,  in  consumption  goods,  the  main- 
tenance of  labourers,  and  leaving  them  free  to  invest  their  labour  and 
natural  agents  in  lengthy  processes.  Thus  capital  is  not  an  independent 
productive  ^wer,  but  an  intermediate  product  oi'  nature  ana  labour— a^ 
medium  through  which  they  both  work.]  The  claim  of  independence 
would  never  have  been  made  but  for  the  assumed  parallelism  between 
factors  of  production  and  branches  of  income  . . . pp.  92 — 99 

Chapter  IV.  The  Theory  of  the  Formation  of  Capital  Capital,  both 
in  its  origin  and  its  growth,  is  the  result  of  production  and  saving — not 
necessarily  a direct  saving  of  capital,  but  of  consumption  goods  wMch  leave 
labour  and  land  free  to  produce  capital  ....  pp.  100 — 105 

Chapter  V.  Formation  of  Capital  in  a Community.  At  any  given 
moment  the  capital  of  a community  consists  of  a mass  of  intermediate 
products,  some  at  different  stages  of  the  same  length  of  roundabout  journey, 
others  at  the  same  stage  of  processes  of  different  lengths.  Eepresentation 
of  this  by  concentric  circles,  the  outer — that  nearest  consumption — being 
. the  largest,  both  in  kinds  of  products  and  amount  of  capital  invested. 

Detailed  proof  of  the  proposition  of  last  chapter,  and  demonstration  that, 
alike  in  socialism  and  in  individualism,  saving  is  necessary 

pp.  106—118 

Chapter  VI.  Possible  Objections,  (i)  That  most  capital  is  not  fitted  for 
immediate  consumption,  and  that  there  is  thus  no  abstinence  in  not  con- 
suming it — which  does  not  affect  the  fact  that,  for  the  formation  of  capital, 
productive  powers  must  be  withdrawn  from  the  service  of  the  present, 
although  it  is  a resisonable  argument  against  those  who  confuse  saving  with 
moral  desert.  (2)  That  saving  must  be  a saving  of  surplus,  and  surplus  is 
due  to  industriousness — all  the  same,  the  product  of  industry  must  not  be 
consumed  but  saved.  The  true  place  of  saving  as  directing  nature  and 
labour  towards  the  production  of  capital,  not  of  consumption  goods.  (3) 
That  non-consumption  is  a pure  negative — which  has  force  only  against 
those  who  elevate  saving  into  an  independent  factor  of  production.  This 
brings  us,  then,  to  the  further  question : Why  do  people  save  capital, 
and  we  must  before  going  further  find  a basis  for  our  interest  theory  in 
the  theory  of  value  .......  pp.  119 — 125 


BOOK  III 


VALUE 


/ 


Chapter  L The  Two  Conceptions  of  Value.  The  old  division  into  Use 
value  and  Exchange  value  we  shall  replace  by  Subjective  value  (importance 
to  human  wellbeing)  and  Objective  Exchange  value  (purchasing  power) 


pp.  129—132 


xxxii  ANALYTICAL  TABLE  OF  CONTENTS 

Chapter  II.  Nature  and  Origin  of  Subjective  Value  While  all  goods 

by  definition  have  a certain  relation  to  hunian  wellbeing,  there  is  a 
difference  between  usefulness,  the  general  capacity  to  subserve  wellbeing; 
and  value,  the  indispensable  condition  of  wellbeing.  For  the  emergence 
of  value  there  must  be  scarcity  relative  to  demand,  else  we  should  not 
economise  .........  pp.  133 — 137 

Chapter  III.  The  Amount  of  Value.  From  the  foregoing  the  amount  of 
a good’s  value  would  seem  defined  by  the  amount  of  wellbeing  actually 
dependent  on  it.  But  this  is  confronted  by  the  old  paradox  that  bread 
has  little  value  and  diamonds  much.  The  solution  will  be  found  in  accurate 
examination  of  what  really  is  the  amount  of  wellbeing  dependent  on  any 
goods,  and  to  get  at  this  we  have  to  put  two  questions.  First ; when  we 
speak  of  satisfaction  of  want  (economic  wellbeing)  do  we  mean  kinds  of 
want  or  concrete  feelings  of  want  ? The  older  theory  made  the  mistake  of 
saying  the  former,  and  so  considered  that  which  satisfied  the  most  vital 
needs  the  most  valuable.  Whereas  the  slightest  casuistic  consideration 
shows  that  we  measure  the  importance  of  a good  by  its  relation  to  the 
concrete  want  as  it  arises,  and  not  to  the  totality  which  constitutes  the 
kind.  Representing  kinds  of  wants  and  concrete  wants  in  a typical 
scheme,  we  can  see  how  little  the  kind  tells  us  of  the  urgency  of  the  con- 
crete want  .........  pp.  138 — 145 

Chapter  IV.  The  Marginal  Utility.  Second : where  a good  is  capable 
of  satisfying  wants  of  different  importance,  which  is  the  dependent  want 
the  satisfaction  of  which  determines  value  ? The  answer  is  ■ — the  one 
which  would  fail  of  its  satisfaction  without  the  good  ; that  is,  the  least 
important  among  those  actually  satisfied.  Thus  vahie  is  detennined  by 
Marginal  Utility.  Illustration  of  the  sacks  of  corn.  In  industrial  life  the 
familiar  fact  that  quantity  is  in  inverse  ratio  to  value  is  an  empirical 
statement  of  this  law : the  more  goods  there  are  of  a kind  the  less  urgent 
is  the  last  want  satisfied,  and  twice  "oers&.  Thus  we  have  the  natural 
explanation  why  bread  has  little  value  and  diamonds  much  pp.  146—153 

Chapter  V.  Complications.  We  must  be  careful  to  determine  in  each 
case  what  is  the  marginal  utility.  For  instance,  (1)  in  assessing  the  value 
of  a durable  good,  or  a collective  good  (like  a harvest),  we  have  to  sum  up 
the  importance  of  many  concrete  wants  ; (2)  the  value  of  most  goods  is  not 
determined  by  their  own,  but  by  a foreign  utility,  that  of  goods  substituted 
for  them,  either  by  purchase  or  production — a principle  of  wide  application 
in  present  economic  life  .......  pp.  154 — 158 

Chapter  VI.  What  determines  Marginal  Utility.  It  is  the  relation 
between  wants  and  their  provision.  If  wants  are  many  and  intense  and 
provision  is  scant,  there  are  many  unsatisfied  layers  of  want,  and  the 
marginal  utility  is  high,  and  vice  versd.  Thus  a good  has  many  subjective 
values,  and  goods  generally  have  different  values  to  different  classes  of 
society  ..........  pp.  159 — 161 

Chapter  VII.  Alternative  Uses.  When  a commodity  admits  of  different 
kinds  of  use,  it  is  the  highest  marginal  utility — the  marginal  utility  of  the 


ANALYTICAL  TABLE  OF  CONTENTS  xxxiii 

most  useful  employment — that  decides  its  value : the  other  (excluded) 
employments  usually  halve  no  influence  on  practical  calculations 

pp.  162 — 165 

Chapter  VIII.  Subjective  Exchange  Value.  Organised  exchange  gives 
almost  every  good  a second  value — the  indhect  importance  which  it  has 
for  human  wellbeing  through  its  capacity  of  being  bartered  for  goods  which 
directly  affect  human  wellbeing'.  Where  this  and  subjective  use  value 
compete,  value  is  decided  by  the  higher  (alternative)  employment  of  the  two. 
Illustration  of  how  subjective  and  objective  exchange  value  may  move  in 
different  directions  .......  pp.  166 — 169 

Chapter  IX.  The  Value  of  Complementary  Goods.  Where  several 
goods  co-operate  towards -one  utility  the  value  of  the  complete  group  is  the 
, value  of  the  group’s  marginal  utility,  except  where  all  the  members  ai’e 
replaceable.  If  each  member  is  irreplaceable,  and  has  no  use  outside  the 
gro.up,  then  one  member  has  the  value  of  the  whole  group.  But  where  the 
members  are  capable  of  other  (though  less  remunerative)  employments, 
each  member  has  one  value  as  complement  and  another  as  isolated.  Lastly, 
where  some  members  are  replaceable,  these  members  never  have  any  greater 
value  than  that  given  them  in  isolation  outside,  while  the  irreplaceable 
member  gets  the  remainder  of  the  gi’oup  value.  The  far-reaching  bearing 
of  this  on  the  distribution  problem  ....  pp.  170 — 178 

Chapter  X.  The  Value  of  Productive  Goods.  Value  and  Costs. 

It  has  generally  been  held  that  the  value  of  goods  is  regulated  by  the  costs 
of  their  production.  But,  adopting  Monger’s  division  of  goods  into  ranks, 
it  becomes  evident  that  productive  groups  only  get  their  value  (if  value  is 
importance  for  human  wellbeing)  from  the  last  link  in  the  chain,  the  final 
consumption  good.  Thus  the  value  of  the  productive  groups  and  of  the 
final  product  must  be  substantially  the  same,  and  costs  of  production  are 
reflated  by  the  marginal  utility  of  final  products,  although  each  group 
has  its  immediate  measure  in  its  particular  intermediate  product.  Appeal- 
ing to  experience,  the  well-known  law  of  costs,  affirming  the  identity  of 
costs  and  products  although  putting  the  causal  connection  the  wrong  way 
about,  confirms  this.  The  identity,  however,  is  disturbed  by  two  causes— 
(1)  irregular  fluctuations,  (2)  the  normal  divergence  in  which  interest 
emerges.  Looking  now  tg  the  fact  that  one  group  of  productive  goods 
may  pass  into  products  with  different  marginal  utilities,  we  find  that  it  is 
the  marginal  utility  of  the  least  remunerative  employment  that  determines 
value.  ■ But  once  value  is  thus  given  to  costs,  it  in  turn,  where  goods  are 
freely  produced,  transmits  itself  to  the  other  products.  Thus  the  law  of 
costs,  w'hen  understood  as  a particular  law  of  value,  is  quite  correct,  and  is 
not  in  contradiction  with  the  universal  law  of-  marginal  utility 

pp.  179—189 


XXXIV 


ANALYTICAL  TABLE  OF  CONTENTS 


BOOK  IV 

PRICE 

Chapter  L The  Fundamental  Law.  The  motive  of  exchange  in  general 
is  the  striving  after  economical  advantage  : postulates  of  this  motive.  The 
condition  of  exchange — that  the  exchangers  put  different  values  upon  the 
commodity  and  the  equivalent  price.  The  most  capable  exchanger — the 
one  who  attaches  most  value  to  the  good  and  least  to  the  equivalent 

pp.  193—197 

Chapter  II.  Isolated  Exchange.  Here  price  is  determined  somewhere 
between  the  subjective  valuation  of  the  buyer  as  maximum  and  that  of  the 
seller  as  minimum  .......  pp.  198 — 199 

Chapter  III.  One-sided  Competition.  Where  there  are  several  buyers 
and  one  seller,  price  is  detennined  between  the  subjective  valuation  of  the 
actual  and  that  of  the  most  capable  unsuccessful  purchaser  ; where  there  are 
several  sellers,  between  that  of  the  actual  and  that  of  the  most  capable 
excluded  seller  ........  pp.  200 — 202 

Chapter  IV.  Two-sided  Competition.  The  course  of  competition  between 
several  buyers  and  several  sellers  shown  by  an  illustrative  scheme,  proving 

(1)  that  transactions  are  closed  between  the  most  capable  competitors, 

(2)  that  price  is  determined  by  the  valuations  of  the  marginal  pairs,  (3) 
that  there  is  an  exhaustive  analogy  between  the  formation  of  price  and 
that  of  subjective  value,  and  (4)  that  price  is,  from  end  to  end,  the  resultant 
of  subjective  valuations.  The  effect  which  the  various  groups  of  valuations 
have  on  price  ........  pp.  203 — 213 

Chapter  V.  The  Law  of  Supply  and  Demand.  The  price  zone 
determined  by  the  marginal  pairs  may  also  be  characterised  as  that  within 
which  Supply  and  Demand  are  in  equilibrium.  In  two  caises,  the  price  of 
money  and  the  price  of  labour,  this  latter  formula  is  even  more  exact 

pp.  214—217 

Chapter  VI.  The  Individual  Determinants  of  Price.  The  level  (high 
or  low)  of  the  valuation  of  the  marginal  pairs  is  a resultant  of  the  number 
and  intensity  of  the  desires  on  both  sides.  Analysing  this  into  factors  we 
find  (1)  extent  of  demand,  (2)  intensity  of  demand — the  latter  further 
analysed  into  the  buyers’  subjective  valuations  of  the  commodity  and  of  the 
equivalent  price,  (3)  extent  of  supply,  (4)  intensity  of  supply — the  latter 
further  analysed  into  the  sellers’  subjective  valuations  of  the  commodity 
and  of  the  equivalent  price.  But  where  commodities  are  made  for  sale 
the  sellers’  subjective  valuations  fall  out  altogether,  and  price  is  determined 
by  the  valuation  of  the  last  buyer  ....  pp.  218 — 222 


ANALYTICAL  TABLE  OF  CONTENTS’ 


XXXV 


Chapter  VII.  The  Law  of  Costs.  The  law  that  price  tends  to  equality  - 
with  costs  of  production  seems  at  first  sight  to  contradict  our  law.  But  ; 
the  concatenation  is  really  the  following.  The  consumers’  subjective 
valuations  for  each  class  of  commodity  determine  the  consumers’  demand. 
Against  this  stands  supply  of  the  particular  commodity.  The  valuations 
of  the  marginal  pairs  determine  its  price.  This  price  again  determines 
the  extent  and  intensity  of  the  manufacturers’  demand  for  raw  material, 
and  this  material  passes  to  the  most  capable  buyers  at  the  valuation  of  the 
last  buyer.  Thus  it  is  the  least  remunerative  employment  (the  market/] 
equivalent  of  the  subjective  marginal  utility)  that  determines  the  value  of  j 
the  cost  goods.  What  gives  colour  to  the  law  of  costs  is  the  subsequent  1 
phenomenon,  that  the  value  thus  given  to  cost  goods  by  marginal  product 
is  then  transmitted  from  these  costs  to  products  of  originally  higher  marginal 
utility.  Explanation  of  cases  where  the  movement  of  price  seems  to  be 
• from  costs  to  products,  as  in  improvement  of  processes  : increased  supply 
changing  the  level  of  subjective  valuations,  and  lowering  the  marginal 
utility.  The  symmetry  between  costs  and  products  is  disturbed  by  two 
causes — (1)  general  friction,  (2)  the  lapse  of  time.  This  leads  us  to  the 
consideration  of  the  effect  of  differences  of  time  on  the  valuation  of  goods 

pp.  223 — 234 


BOOK  V 

PEESENT  AND  FUTUEE 

Chapter  I.  Present  and  Future  in  Economic  Life.  Our  general 
economic  conduct  has  more  reference  to  the  future  than  we  are  always 
conscious  of.  Not  feeling  future  sensations  we  yet  anticipate  and  compare 
them,  and  the  greater  part  of  our  wealth  in  the  present  consists  of  goods 
getting  ready  for  the  future.  As  future  feelings  are  commensurable  so  are 
future  goods,  our  basis  of  valuation  being  the  marginal  utility  which  they 
win  bring  us  in  the  future.  It  should  be  noted,  however,  that  the  element 
of  objective  uncertainty  m future  goods  has  nothing  to  do  with  the  pheno- 
menon of  interest ; it  is  simply  a premium  against  risk.  Our  fundamental 
principle,  then,  is,  that  present  goods  have  a higher  subjective  value,  and 
thus  a higher  price,  than  future  goods  of  like  kind  and  number.  This  is 
the  resultant  of  the  causes  mentioned  in  the  three  following  chapters 

pp.  237 — 248 

Chapter  DL  Differences  in  Want  and  Provision  for  Want.  Here  two 
cases  are  typical — (1)  that  of  immediate  distress,  (2)  where  economical  pro- 
spects for  the  future  are  hopeful.  In  these  cases  present  goods  are  obviously 
valued  more  highly  than  future.  Even  where  the  future  does  not  promise 
better  provision  than  the  present,  the  shilling  in  my  pocket,  as  a durable 
good,  avails  for  the  present,  for  the  future,  and  for  any  chance  that  may 
turn  up  meantime.  The  exceptions  to  this — as  in  some  perishable  goods 
— are  insignificant  .......  pp.  249 — 252 


xxxvi 


ANALYTICAL  TABLE  OF  CONTENTS 


Chapter  III.  Underestimate  of  the  Future.  Men,  civilised  as  well  as 
savage,  generally  underestimate  the  future  simply  because  it  is  futme. 
Ihree  reasons  for  this  : (1)  want  of  imagination,  (2)  defect  in  will,  (3) 
Whe  uncertainty  of  life.  The  latter  obtains  directly  only  as  regards  long 
periods,  but  by  a species  of  arbitrage  this  underestimate  is  put  into  a 
definite  percentage  which  obtains  for  all  periods.  This  second  factor  com- 
bines with  that  of  last  chapter  to  increase  the  agio  on  present  goods 

pp.  253—269 

Chaptjer  IV.  The  Technical  Superiority  of  Present  Qoods-  As  we 

^^^^ow,  methods  of  production  which  take  time  are  more  productive — not  only 
as  regards  units  of  product,  hut  as  regards  value.  Tables  to  prove  this  is 
so,  even  independent  of  the  influence  of  the  other  two  factors.  The  same 
superiority  attaches  to  present  goods  simply  as  consumption  goods,  in  so 
far  as  command  over  such  goods  leaves  our  means  of  production  free  for 
investment  in  lengthy  processes.  This  is  the  source  of  Jevons’s  mistake  in 
considering  subsistence  as  the  only  capital  . . . pp.  260 — 272 

Chapter  V.  Co-operation  of  the  Three  Factors.  Tire  action  of  the  first 
two  is  cumulative,  that  of  the  third  alternative,  but  the  three  really  co- 
operate towards  the  same  end,  the  preference  for  present  goods.  For  the 
reasons  already  given,  all  classes — needy,  careless,  rich,  saving — find  some- 
thing in  present  goods  superior  to  future.  These  subjective  valuations 
meeting  in  a market  determine  a price  which  contains  an  agio  : this  agio, 
once  established,  has  a reflex  influence  on  subjective  estimates,  and  a 
developed  exchange  system  gradually  levels  arbitrary  Valuations  into  a 
normal  Tate  .........  pp.  273 — 281 


BOOK  VI 

THE  SOUECE  OF  INTEREST 

Chapter  I.  The  Loan  and  Loan  Interest.  Here  we  have  the  simplest 
case : the  exchange  of  two  goods,  one  present,  the  other  future,  with  the 
agio  necessarily  on  the  former.  Misunderstandings  of  this  in  the  past. 
Knies’s  answer  to  the  criticism  of  the  Use  theory  in  Capital  and  Interest. 
Principal  plus  interest  is  the  equivalent  in  future  goods  of  the  principal 
lent  in  present  goods.  A loan  without  interest  is  a sale  below  market 
price  ..........  pp.  285 — 298 

Chapter  n.  The  Profit  of  Capitalist  Undertaking.  Principles  of 
Explanation.  The  business  of  the  capitalist  is  to  buy  goods  of  remoter 
rank,  and  transform  them  into  consumption  goods,  his  gain  being  called 
“profit.”  One  point  must  be  made  clear  before  going  further  ; these  pro- 
ductive goods  are  economically  future  goods,  and  subject  to  the  same  dis- 
count as  the  future  consumption  goods  into  which  they  are  ultimately 


ANALYTICAL  TABLE  OF  CONTENTS  xxxvii 

changed.  This  is  the  ex23lanation  of  the  so-called  cheap  buying.  The 
capitalist  gets  his  profit  simply  from  the  ripening  of  the  future  goods  in  his 
hand  into  present  goods  ......  pp.  299—303 

Chapter  III.  The  Profit  of  Capitalist  Undertaking.  Complications. 

(1)  Our  estimate  of  future  goods  is  graduated  according  to  the  intervening 
time  : corresponding  with  this  the  value  of  productive  goods  rises  steadily 
as  the  process  goes  on,  and  the  increased  value  is  transferred  from  branch 
to  branch  of  production.  (2)  Dmable  productive  goods  contribute  differ- 
ent parts  of  their  contents  to  products  maturing  at  various  points  of 
time,  and  so  unite  the  characteristics  of  durable  and  of  productive  goods — 
of  which  later.  (3)  Productive  goods  admit  of  various  employments  turn- 
ing Out  different  products  at  different  periods  ; how  then  can  they  be 
valued  in  present  goods  ? — In  the  marginal  utility  of  such  goods  the  future 
as  well'as  the  present  uses  have  already  been  taken  into  consideration,  the 
possible  futm’e  uses  being  reduced  to  present  value.  It  remains  for  us  now 
to  confirm  these  theoretical  conclusions  by  appeal  to  the  actual  markets 
where  means  of  production  are  exchanged  for  present  goods  pp.  304 — 312 

Chapter  IV.  The  Profits  of  Capitalist  Undertaking.  The  Labour 

Market.  Assuming  that,  over  the  community,  an  average  two  year.s’. 
process  is  tm-ning  out  a product  w'orth  x ner  week,  supply  here  will  be- 
represented  by  a gi-eat  number  of  labourers  ready  to  accept  much  less  than 
X rather  than  work  in  short  unproductive  processes.  The  demand  comes 
from  the  undertakers,  who  must  find  it  their  interest  to  sell  their  goods  to 
labour.  What  wage  can  they  pay  ? In  simple  circumstances  they  could 
employ  their  capital  in  extending  their  own  processes,  and  so  increase  their 
return.  If,  instead,  they  use  it  to  pay  labourers,  they  must  gain  more  in 
the  buying  of  labour  than  they  lose  by  dispensing  with  the  extension  of 
their  process.  In  modern  comjdex  circumstances  the  ca^iitalists,  who  are 
not,  as  a rule,  workers,  lend  their  capital,  through  the  channels  of  organ- 
ised credit,  to  those  who  wish  to  make  their  labour  more  productive,  and 
find  an  agio  already  in  the  market.  But  Loan  and  Labour  markets  alike 
are  parts  of  the  great  Subsistence  market  we  have  now  to  examine 

pp.  313—318 

Chapter  V.  The  Profit  of  Capitalist  Undertaking.  The  General 
Subsistence  Market.  A fundamental  proposition  : The  fund  available 
for  advances  of  subsistence  consists  of  the  entire  wealth  of  a community 
exclusive  of  land.  With  the  exceirtion  of  the  small  amount  consumed  wdth- 
out  retmn  or  wasted,  and  that  consumed  by  independent  producers,  all 
wealth  comes  to  this  gi’eat  market,  and  is,  directly  or  indirectly,  advanced 
to  labour.  It  may  be  objected  that  wealth  in  many  forms,  such  as  tools, 
is  not  subsistence.  But  all  that  is  required  is  that  wealth  should  be 
changed  gradually  into  subsistence  as  the  workers  of  the  successive  stages 
require  it.  The  subsistence  fund,  then,  includes  not  only  finished  goods, 
but  goods  at  all  stages  of  progress,  and  goods  going  through  all  lengths  of 
process.  Thus  the  average  production  period  possible  in  a countiy  depends 
on  the  amount  of  its  wealth.  Proof  that  the  amount  of  subsistence  required 


ANALYTICAL  TABLE  OF  CONTENTS 


xxxviii 

before  entering  on  any  process  must  be  sufficient  for  a little  over  half  the 
production  period  ........  pp.  319 — 328 

Chapter  VI.  The  Profit  of  Capitalist  Undertaking.  The  General 
Subsistence  Market  {contini^el).  To  find  the  price  at  which  finished 
present  goods  exchange  against  future  on  the  subsistence  market,  we  must 
examine  more  carefully  the  extent  and  intensity  of  supply  and  demand. 
The  demand  consists  of  (1)  wage-earners,  (2)  independent  producers  wish- 
ing to  extend  their  processes,  (3)  borrowers  for  consumption.  Thus  it  is 
easy  to  see  that  the  demand  must  always  be  in  excess  of  the  supply  ; that 
an  agio  must  appear : and  that,  as  putting  the  drag  on  undue  extensions  of 
process,  this  agio  is  as  healthy  as  it  is  inevitable.  Finally  what  is  true  of 
labour  is  true  of  uses  of  land  and  of  intermediate  products.  Error  of 
Socialist  theory  in  not  seeing  that  so-called  “cheap  buying”  is  true  of 
these  as  well  as  of  labour  ......  pp.  329 — 338 

Chapter  VII.  Interest  from  Durable  Goods.  The  value  of  a dmable 
good  being  a sum  made  up  of  all  the  material  services  inhering  in  it, 
the  single  service  may  obtain  an  independent  value  and  price.  Where 
a good  lasts  for  years  the  remote  services  suffer  the  same  discount  of  value 
as  future  goods  in  general.  But  as  each  service  is  given  off,  the  remaining 
services,  by  one  year's  approximation  to  the  present,  grow  one  year  more 
valuable,  and  each  year  the  parent  good  loses  the  value  of  the  most  remote 
service  still  inhering  in  the  good.  Thus  what  the  owner  gains  is  the  gross 
present  value  of  the  annual  service  thrown  off : what  he  loses  (wear  and 
tear)  is  the  value  of  the  most  remote  service  : the  difference  between  these 
two  is  the  net  return  of  interest.  Thus  our  theory  gives  a simple  answer 
where  Productivity,  Exploitation,  and  Use  theories  found  only  a stone  of 
stumbling.  Obviously  also  it  gives  the  natural  explanation  of  Capitalisa- 
tion ..........  pp.  339 — 349 

Chapter  VIII.  Interest  from  Durable  Goods  {corvtinued).  In  durable 
goods  that  are  also  productive  goods  we  find  a double  phenomenon  : although 
the  good  has  perished  in  giving  off  its  successive  services,  the  services  thus 
incorporated  in  the  process  remain  bound  up  in  it  till  its  completion  : thus 
it  bears  interest  after  it  has  ceased  to  exist,  but  the  interest  is  now  ascribed 
to  the  circulating  capital  in  which'  the  services  have  been  incorporated,  and 
not  to  the  “outlay.”  An  important  application  If  a good  is  infinitely 
durable,  the  capitalised  value  is  infinitely  small  compared  with  the  sum  of 
successive  services ; the  last  service  is  infinitely  small,  and  wear  and  tear 
vanishes  : the  gross  return  and  the  net  return  are  one.  Here  then  we  get 
the  explanation  of  land  rent,  as  simply  a special  case  of  interest  obtained 
from  durable  goods.  The  bearing  of  this  on  the  Eicardian  theory 

pp.  350 — 357 

Chapter  IX.  Results.  Owners  of  capital,  then,  are  merchants  in  present 
goods,  and  such  goods  being  more  valuable  than  the  “future  goods,” 
Labour,  Uses  of  land,  and  Capital,  the  agio  or  interest  included  in  the 
price  is  only  reasonable.  Circumstances  may  often  produce  exploitation 


ANALYTICAL  TABLE  OF  CONTENTS 


XXXIX 


and  usury,  but  in  the  essence  of  interest,  there  is  nothing  unjust ; as  in  all 
human  institutions,  we  have  to  balance  advantages  with  drawbacks,  and 
the  balance  swings  in  favour  of  interest  ....  pp.  358 — 364 

Chapter  X.  Interest  under  Socialism.  Even  here,  as  time  does  not 
stand  still,  the  causes  of  interest  would  still  be  active.  Suppose  all  other 
sources  stopped,  if  dm'able  goods  were  exchanged  for  less  capitalised  value 
than  the  full  sum  of  all  their  futui'e  services  the  agio  of  interest  would 
emerge.  Indeed  under  Socialism  the  state  would  ‘ ‘ exploit  ” the  labourers — 
perhaps  to  divide  out  the  amount  more  equitably,  but  still  to  divide  it  as 
interest,  not  as  wage  .......  pp.  365 — 371 


BOOK  VII 

THE  BATE  OF  INTEEEST 

Chapter  I.  The  Bate  in  Isolated  Exchange.  Our  present  task  is  to 
point  out  the  concrete  circumstances  that  influence  the  valuations  on  both 
sides.  Fu’st,  of  isolated  exchange.  In  the  production  loan  what  deter- 
mines the  subjective  valuation  of  the  suitor  is  the  amount  he  will  gain  by 
extending  his  process.  But  as,  beyond  a certain  point,  the  sui’plus  retiu'ns 
decrease  as  processes  extend,  a present  loan  has  less  value  in  proportion  to 
the  length  of  process  already  provided  for  . . . pp.  375 — 380 

Chapter  IL  The  Bate  in  Market  Transactions.  First  assuming  that 
the  demand  comes  froni  the  wage-earners  alone,  how  high  will  rise  the 
agio  ? Here  we  meet  a special  diflBculty.  The  price  of  labour  is  the 
resultant  of  subjective  valuations  of  buyer  and  seller,  but  what  value  can 
the  capitalist  put  upon  the  labour  he  wishes  to  buy  wheu  it  will  bring  a 
dift'erent  product  and  value  according  to  the  length  of  process  in  which  it 
is  invested,  and  when,  again,  the  process  he  will  adopt  depends  upon  the 
wage  he  must  pay  1 The  “fixed  point”  is  found  in  the  fact  that  the 
existing  stock  of  wealth  can  always  buy  aU  the  wage  labour  offered.  This 
gives  a certain  definiteness  to  the  average  length  of  process,  and  so  the 
product  on  which  the  capitalist  bases  his  valuation.  But  again  it  may  be 
a long  process  at  a low  wage  or  a short  process  at  a high  Wage.  The  final 
answer  is,  that  the  wage  offei'ed  must  bring  subsistence  and  number  of 
workers  to  • equilibrium  in  such  a way  that  neither  party  can  disturb  it  by 
under-bidding  or  over-bidding.  Or,  to  put  it  positively ; The  rate  is 
determined  by  the  productiveness  of  the  last  economic  extension  of  process, 
in  such  a way  that  the  amount  of  capital  making  the  extension  possible 

must  bear  a less  interest  than  the  surplus  return  obtained  by  means  of  it 

which  is  pretty  much  identical  with  Thiinen’s  “last  dose  of  capital  ” 

pp.  381 — 394 

Chapter  IIL  The  Bate-  in  Market  Transactions  {continued). 
But  what  are  the  concrete  determinants  which  decide  the  degi-ee 


xl 


ANAL  YTICAL  TABLE  OF  CONTENTS 


of  productiveness  of  the  last  extension  ? If,  ceteris  paribus,  subsist- 
ence increases,  the  same  calculations  as  before  show  that  equilibrium 
cannot  be  maintained  without  an  extension  of  process,  an  increase  of  wage, 
and  a fall  of  interest — the  latter  accounted  for  by  the  fact  that  men  can 
only  keep  the  increased  wealth  employed  by  extensions  of  process  which 
involve  decreased  surpluses.  If,  on  the  other  hand,  subsistence  falls, 
equilibrium  demands  contraction  of  processes,  fall  in  wage,  and  rise  in 
interest.  If,  again,  population  rise  or  fall  we  have  the  converse  results. 
Lastly,  if  productiveness  increase,  ceteris  paribus,  interest  will  rise  along 
with  the  surplus  now  yielded  by  the  last  extension.  Thus  we  conclude 
that  there  are  three  decisive  factors  which  affect  the  rate  of  interest,  and 
this  is  confirmed  by  history  and  experience  pp.  395 — 402 

Chapter  IV.  The  Market  for  Capital  in  its  Full  Development.  And 

now  to  give  the  features  of  actual  life  to  our  abstract  scheme.  It  makes 
no  difference  to  om-  aa'gument  that  product  and  wage  vary  from  employ- 
ment to  employment : the  essential  matter  for  interest  is  the  relation 
between  the  two.  Nor  does  it  matter  that  in  actual  life  the  annual 
increment  due  to  extensions  of  process  varies  from  employment  to  employ- 
ment : capital  follows  an  isohypse  of  surplus  returns,  not  of  periods  of 
production,  but  this  does  not  alter  the  essential  circumstances  on  which 
our  law  rests.  Again,  there  are  other  demands  besides  that  of  the  wage- 
earners — (A)  that  for  consumption  credit,  completely  co-ordinate  with  the 
other,  (B)  that  of  landowners  who  require  subsistence  proportioned  to  the 
length  of  their  production  processes,  (C)  that  of  capitalists  themselves, 
although  their  claim  on  subsistence  is  effect  and  not  cause  of  the  agio. 
Lastly,  we  may  enumerate  the  seven  concrete  factors  in  the  interest  rate 

pp.  403—412 

Chapter  V.  The  Market  for  Capital  in  its  Full  Development  {con- 
tinued). To  look  now  at  the  struggle  between  immediate  consumption 
and  accumulation.  In  good  economical  management  present  and  future 
will  be  alike  considered,  and  provision  made  that  the  present  consumption 
shall  not  reduce  the  level  of  future  enjoyment.  Thus  parent  wealth  should 
be  saved,  and  even  some  portion  of  income.  The  two  great  deviations 
from  economic  conduct  are  due  (1)  to  the  perspective  undervaluation  of 
the  futme  and  (2)  to  the  neglect  of  exact  calculation  of  the  future’s  claims. 
Differences  between  our  theory  and  that  of  the  Wage  Fund.  Finally,  the 
actual  market  for  capital  is  not  one  gi'eat  undivided  market,  hut  a great 
number  of  part  markets  all  communicating  and  arbitrating  each  other’s 
prices.  Conclusion  .......  pp.  413 — 424 


Appendix  to  page  327 
Index  of  Authors  mentioned  . 


. pp.  425-:-426 
. pp.  427 — 428 


INTKODUCTION 


In  systems  of  Political  Economy  the  word  Capital  and  the 
theory  of  Capital  are  regularly  met  with  in  two  distinct 
spheres  ; first,  under  Production,  and,  second,  under  .Distribu.- ' 
tion.  In  the  former  case  capital  is  represented  as  a factor  or 
tool  of  production : as  an  instrument  which  men  use  to  extort 
from  nature  the  various  forms  of  wealth  unattainable  by  simple 
labour.  In  the  latter  case  capital  appears  as  a source  of 
income  or  a rent  fund ; and  we  are  shown  how,  in  the  division 
among  the  various  members  of  society  of  that  wealth  which 
has  been  produced  in  common,  capital  acts  like  a magnet, 
drawing  a portion  of  the  national  product  to  itself,  and  deliver- 
ing it  over  to  its  owner : it  appears,  in  a word,  as  the  source 
of  Interest., 

When  we  are  told  that  capital  assists  in  the  production  of 
wealth,  and  then  again  that  it  assists  in  the  obtaining  of 
wealth  for  its  owner,  we  are  apt  to  jump  to  the  conclusion 
that  the  two  phenomena  are  intimately  and  essentially  con- 
nected, and  that  the  one  is  the  immediate  result  of  the  other — 
that  capital  can  bring  wealth  to  its  owner  because  capital  assists 
in  the  production  of  wealth.  .As  a fact.  Political  Economy 
has  taken  up  this  idea  only  too  readily  and  too  completely. 
Captivated  by  the  deceptive  symmetry  that  exists  between  the 
three  great  factors  of  production — Nature,  Labour,  Capital — 
and  the  three  great  branches  of  income — Eent,  Wage,  and 
Interest  — the  science,  from  Say’s  day  till  the  present,  has 
taught  that  these  three  branches  of  income  are  nothing  else 

than  the  payment  for  the  three  factors  of  production,  and  that 


2 


INTRODUCTION 


1 


Interest  in  particular  is  nothing  else  than  the  compensation 
which  capital  receives  for  its  productive  services  when  the 
product  is  divided  out  among  society.  Propounded  by  various 
interest  theories  in  various  forms  this  idea  has  found  its  most 
conciRR  and,  at  the  same  time,  its  most  naive  expression,  in 
the  well-known  “ Productivity  theories,” — those  theories  which 
explain  interest  directly  as  the  natural  fruit  of  a productive 
power  peculiar  to  and  resident  in  capital.' 

In  beginning  the  study  of  the  theory  of  Capital,  it  cannot 
be  too  emphatically  stated  that  this  idea,,  simple  and  natural 
as  it  may  appear,  contains  a,  prejudgment  calculated  to  pre- 
clridft  nnhia.R.Rcd  chnsideration  of  the  problems  of  capital  If 
there  were  no  other  objection,  the  fact  that  the  word  capital  is 
never  used  exactly  in  the  same  sense  in  the  two  spheres  of 
phenomena  must  give  us  pause.  True,  all  capital  which  .serves 
as  a tool  of  production  is  also  capable  of  hearing  interest,  but 

the  converse  is  not  the  case.  \/K  dwelling-house,  a hired  horse, 
a circulating  library  bear  interest  to  their  respective  owners 
without  having  anything  to  do  with  the  production  of  new 
wealth.  If,  in  the  sphere  of  distribution,  the  conception  of 
capital  thus  embraces  objects  which  are  not  capital  in  the 
sphere  of  production^,  this  alone  is  sufficient  to  show  that  the, 
bearing  of  interest  cannot  bv  itself  be  an  _indi cation  oljths 
productive  power  of  capital  We  have  not  to  deal  with  one 
motive  power  transmitting  Itself  to  two  different  spheres ; not 
even  with  two  groups  of  phenomena  which  have  grown  up  so 
intimately  connected  that  the  explanation  of  the  one  is  got 
fully  and  entirely  through  the  explanation  of  the  other ; but 
with  two  distinct  classes  of  phenomena,  yhus  we  have  two. 
distinct  subjeats,  which  give'  us  material  for  two  distinct 
scientific  problems ; and  finally,  we  have  to  seek  for  the 
solution  of  these  problems  by  two  distinct  and  separate  roads. 

It  so  happens,  however,  that  these  reaUy  distinct  problems  are 
accidentaUv  linked  together  by  one  name : they  are  problems 
of  Capital.  It  may  be  that,  besides  identity  of  name,  we  shall 
find  many  inner  relations,  between  the  two  series  of  pheno- 
mena and  the  two  problems ; — our  investigation  shall  decide 
that  later.  But  such  relations  are  yet  to  be  discovered ; they 
must  not  be  assumed ; and  unless  we  would  give  up  all  idea 


1 See  my  Capital  and  Interest,  1890,  p.  111. 


INTRODUCTION 


3 


of  being  unprejudiced  in  our  quest  and  in  our  conclusions, 
ipust  begin  the  iiiquir^^  free  from  any  preconceived  opinion  of 
a necessary  identity,  or  even  of -an  pya  pt  parallfthRm  . between 
the  productive  efficiency  of  cnpital  and  its  power  of  bearing 

interest. 

Our  division  of  the  subject  will  correspond  to  this  real 
independence  of  the  two  problems.  In  one  part  of  the 
present  work  we  shall  take  up  the  .theory  of  Capital  as  a Tool 
of  Production,  and  in  another  the  theory  nf  Tirte.rest.  But 
we  shall  first  devote  a separate  book  to  the  attempt  to  obtain 
some  insight  into  what  Capital  itself  is,  in  conception  and 
nature. 


I 


BOOK  I 

THE  NATURE  AND  CONCEPTION  OF  CAPITAL 


r- 


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V-  • , y , 


■ . -K-'y  \.''  ■<;, 


•.  Vi)!  i^. 


I 


. ■'"'"It-  ■,.  ■ 


j 


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■ '♦••.  . ' ■ .j ' 


/ 


V 


CHAPTER  I 


MAN  AND  NATURE 

There  is  scarcely  a system  or  a text-book  of-PoliticRl  p,conomy 
which  does  not,  at  some  point  or  other,  hring  in  (lisc^issicin.s.  .of 
matters  helong-ing  to  the  physical  sciences.  Usually  these  are 
introduced  in  the  chapter  on  Production.  There  we  are 
taught  that  ro  create  new  goods  does  not  mean  to  create  new 
material,  since  matter  is  constant  and  cannot  be  increased. 
We  learn  what  nature  contributes  to  the  woiiv  of  production 

in  the  shape  of  materials  and  powers ; what  is  done  by  the 
mechanical,  what  by  the  chemical,  and  what  by  the  organic 
powers  of  nature ; what  importance  climate,  heat,  moisture 
have  on  the  development  of  production  ; on  what  physical  and 
technical  foundations  the  working  of  machinery  rests ; and 
many  things  of  this  sort. 

To  the  principle  of  this  custom  no  sensible  person  will 
object.  It  is  the  form  in  which,  consciously  or  unconsciously, 
we  pay  boTna.o'p.  to  one  of  the  weight, lAst-,  principles  of  our 

knowledge,  the  unity  of  all  science.  Ever  since  Bacon  we 
have  recognised  that  no  single  branch  of  inquiry  explains  to 
the  very  end  the  facts  with  which  it  deals,  but  breaks  off  at 
some  point  or  other,  and  passes  on  its  facts  to  some  sister  science 
for  further  treatment,  so  that  the  total  explanation  is  only 
given  by  the  totahty  of  all  the  sciences.  Thus  it  is  that  if 
one  would  not  set  before  his  readers  simply  a collection  of 
barren  fragments,  he  must  add  to  what  is  distinctively  depart- 
mental at  least  so  nmch  as  will  connect  it  with  the  related 
sciences  in,  the  organic  whole  of  human  knowledge,  and  thus 
indicate  the  way  in  which  the  explanations  begun  by  him 
may  be  concluded. 


8 


MAN  AND  NATURE 


BOOK  1 


It  would,  however,  be  rather  impertinent  if  we  theorists 
were  to  think  that  such  terminal  truths — as  we  may  appro- 
priately caU  them — -are  added  only  for  purposes  of  statement 
and  for  the  good  of  our  readers.  Eightly  employed  they 
are  of  much  greater  use  to  ourselves  as  scientific  inquirers. 
They  may  be  an  effectual  means  of  preventing  us Jrnnn  lightly 
building  our  whole  system,  or  parts  of  it,  on_air^  and  uninten- 
tionally maintaining  in  the  name  of  Political  Economy  some- 
thing which,  in  its  assumptions  or  conclusions,  is,  physically 
or  psychologically  speaking,  nonsense.  I must  not  be  mis- 
understood however.  It  is  not  in  the  least  my  meaning  that 
Political  Economy  should  assume  a nature  foreign  to  it,  and 
become  natural  science  or  psychology ; what  T do  mean  is 
that  it  must  never  be  in  contradiction  with  these  sciences. 
What  is  false  in  natural  science  or  psychology  is  false  in  all 
and  every  science.  And  to  prevent  us  unwittingly  running 
counter  to  certain  fundamental  truths,  perhaps  the  best  way  is 
to  put  these  truths  explicitly  in  black  and  white  before  our  eyes. 

Now  the  subject  with  which  we  have  to  deal  in  this  work 
is  of  such  a nature  that  it  very  snecially  requires  to  be  basetl 
on  sound  natural  principles,  and  a very  great  deal  may  be  lost 
by  neglect  of  this.  I have  therefore  strong  reasons  for 
following  the  good  old  custom,  and  prefacing  my  theory  by 
^^some  fundamental  truths  that  stretch  over  into  the  neighbouring 
sphere  of  the  natural  sciences.  I shall  endeavour  not  to  abuse 
the  opportunity  by  inflicting  a mass  of  learned  scientific  detail 
on  the  reader.  The  few  truths  I mean  to  start  with  would 
indeed,  in  a professional  classification,  be  put  within  the  sphere 
of  the  natural  sciences,  but  they  are  of  so  general  a character 
that,  practically,  f.hpy  are  outside  departmental  limits,  ami 
belong  to  the  commonwealth  of  knowledge.  They  are  known 
and  recognised  by  everybody,  and,  in  one  form  or  other,  they 
have  been  expressed  all  along  in  our  economic  literature. 
There  is  really  only  one  thing  that,  I skould  like  to  think, 
will  distinguish  my  use  of  them : I shall  try  so  to  put  tbiemJTiai; 
they  will  not  be  mere  paragraphs  introducing^  the  theory,  but . 
will  remain  present  and  living  imthc-Spirit  ofJL  Usually  these 
excursuses  into  the  domains  of  physics  are  placed  in  some  corner 
of  economical  books  rather  for  ornament  than  use.  In  one 
chapter  they  are  made  much  of ; in  the  next  they  are  forgotten 


CHAP.  I 


GOODS 


9 


and  contradicted.  In  what  follows  I shall  try  to  avoid  this 
error,  and  wherever  anything  depends  upon  these  fundamental 
truths — which  will  very  often  be  the  case  in  a discussion  on 
capital — to  keep  unobtrusively  but  firmly  in  touch  with  them. 
In  this  way,  while  there  is  no  fear  of  our  economical  theory 
obtaining  the  character  of  a theory  of  natural  science,  it  wilL 
not  be  one  that  runs  counter  to  physical  facts.  _ 

Men  strivp.  happiness.  This  is  perhaps  the  most 

general  and,  certainly,  the  most  vague  expression  for  a complex 
of  strivings,  all  of  wliich  have  for  object  the  bringing  about 
of  such  occurrences  and  conditions  as  we  know  and  feel  to  be 
pleasant,  and  the  averting  of  those  we  know  to  be  unpleasant. 
Instead  of  “ striving  after  happiness  we  may  use  the  expres- 
sion “ striving  after  self-preservation  and  self-development,”  or 
“ stri\dng  after  the  greatest  possible  furtherance  of  life  ” ; or 
we  may,  with  equal  propriety,  use  the  words,  “ striving  after 
the  most  complete  possible  satisfaction  of  wants  ” . for  the 
expressions  we  are'" so  famihaf  'wrfK’’ uT  economic  terminology, 

“ want  ” and  “ satisfaction  of  want,”  mean,  in  the  last  resort, 
nothing  else  than,  respectively,  the  unsatisfied  craving  of 
man  to  be  put  under  conditions  he  thinks  desirable  or  more 
desirable  than  those  he  has,  and  the  successful  obtaining  of 
such  conditions. 

The_  whole  world,  as  we  know  it.  is  subject  to  the  law  of 
cause  and  effee.t;  no  effect  can  take  place  without  sufficient 
cause.  From  this  law  man  and  his  conditions  have  no  exemp- 
tion ; none  of  those  beneficent  changes  of  condition,  which  we 
call  “ satisfactions  of  want,”  can  come  about  otherwise  than  as 
the  effect  of  a sufficient  cause ; eA^ery  satisfaction  presupposes 
an  adequate  instrument  of  safisfaction.  The  adequate  instru- 
ments for  the  satisfaction  of  himian  wants,  or — what  is  the 
same  thing — the  causes  of  beneficent  changes  in  human  condi- 
tions, we  call  goods.^ 

The  man-wJfo*“  wants  ” finds  goods  in  different  spheres  of 
the  world  in  which  he  lives ; he  finds  them  in  the  world  of. 
persons  as  well  as  in  the  world  of  things.  For  obvious  reasons, 
which  need  not  be  discussed  here,  we  use  the  word  “ good  ” in 
somewhat  different  ways  in  these  two  spheres.  On  the  one 

See  Menger,  Grundsii/jze  der  Volkswirthscho/ftslehre,  p.  1.  Vienna,  1871. 


10 


MAN  AND  NA  TV  RE 


BOOK 


hand,  we  designate  bv  the  name  of  goods  not  the  persons.  \Kho- 
are  of  use  to  us.  but  only  the  acts,  the  services,  through  which. 
they  are  of  nse ; on  the  other  hand,  we  give  the  name  to  the 
impersonal  material  shapes  themselves,  and  call  them  Material 
as  opposed  to  Personal  goods. 

In  what  follows  we  have  to  do  with  material  goods  only_ 

Material  goods  are  part  of  the  external  world:  they  are 
natural  things.  As  such  they  are,  in  constitution  and  action, 
wholly  and  entirely  natural  products,  and  subject  to  natural 
laws.  The  fact  that  men’s  goods  are  instruments  towards  the 
personal  ends  of  the  “ lord  of  creation  ” gives  these  goods  no 
kind  of  immunity  from  complete  subordination  to  the  natural 
order,  any  more  than  man  himself  is  able  to  emancipate  the 
natural  side  of  his  being  from  similar  control  Material  goods. 
^ therefore,  come  mto  existence  only  as  natural  laws  allow  and 
demand  that  a material  shape,  thus  and  not  otherwise  consti- 
tuted, should  come  into  existence.  They  pass  out  of  existence  if 
a new  combination  of  natural  powers,  working  according  to 
natural  laws,  results  of  necessity  in  the  dissolution  of  their 
' former  material  shape.  They  cannot  exert  the  smallest  effect, 
be  it  useful,  hurtful,  or  indifferent  to  men,  unless  the  given 
coincidence  of  materials  and  powers  under  natural  laws  pro- 
duce this  very  effect  and  no  other. 

These  seem  peculiarly  trifling  propositions.  They  are 
trifling  enough  to  require  no  formal  proof;  indeed,  no  one 
will  seriously  dispute  them.  But,  simple  and  trifling  as 
they  are,  on  certain  tempting  occasions  these  fundamental 
0/ truths  have  been  lost  sight  of.  and  theories  have  been 
put  in  circxilation  which  implicitly  contradict  them.  The 
theorist,  therefore,  has  good  cause  to  emphasise  them,  and  even 
foUow  out  their  logical  conclusions  to  a certain  extent  into 
those  departments  where  they  have  to  do  duty  as,  peculiarly, 
the  fundamental  truths  of  economic  theory.  These  depart- 
ments are  the  function  of  goods  and  the  origin  of  goods ; in 
other  words,  tbp  tViPriyy  of  the  Use  of  goods,  and  the  theory 
of  the  Production  of  goods. 

The  theory  of  the  use  of  goods  I have  already  gone  into  at 
length  in  Capital  and  Interest}  I there  showed  that  material 

* P.  219  (German  edition,  p.  266).  See  also  my  Bechte  und  VerMllnisse,  p. 
61.  Innsbrack,  1881. 


CHAP.  I 


THE  USE  OF  GOODS 


11 


goods  are  nothing  else  than  such  distinct  forms  of  matter  as 
admit  of  the  natural  powers  residing  in  them  being  directed 
to  human  advantage.  I showed  how  the  “ use  ” they  afford  is 
realised  through  concrete  activities  of  these  iia.tural  powers;, 
and,  therefore,  by  real  forth  putting  of  power.  I showed  how 
a use  {Gebrauch  or  Nutzung)  cannot  be  made  of  them  other- 
wise than  by  taking  the  peculiar  forms  of  the  energy  of  the 
good  at  the  proper  moment,  supplying  the  conditions  necessary 
to  render  them  available  where  they  previously  existed  in  an 
unavailable  form,  and  then  bringing  these  forms  of  energ;^^ 
into  proper  connection  with  that  object  in  which  the  useful 
effect  is  to  take  place.  On  these  considerations  I based  the 
conception  of  the  “ Material  Services  ” {Nutzleistungen)  which 
I believe  to  be  the  only  one  that  corresponds  with  facts,  and 
rejected  certain  shadowy  ideas  which  connected  the  old  theory 
of  interest  with  the  word  “ Uses  ” of  goods.  ^Vdiat  remains  for 
us  here  is,  on  the  same  lines,  to  lay  down  certain  fundamental 
ideas  as  to  the  origin  of  material  goods. 

We  have  already  said  that  the  origin  of  natural  goods  lies 
entirely  mider  the  control  of  natural  laws.  No  material  good 
can  come  into  existence  except  when  a previous  coincidence  of 
materials  and  powers  has  made  it  necessary  in  physical  law  that 
exactly  this  form  of  matter  should  emerge.  Looked  at  from 
the  point  of  view  of  nature,  the  formation  of  goods  is  a purelA^ 

natural  process.  Not  so,  however,  from  the  point  of  view  of 
man_  Man  has  cause  to  lay  emphasis  on  a distinction  which 
is  not  visible  from  the  purely  physical  standpoint.  One. 
great  class  of  useful  forms  of  m a, tier  comes  into  existence 
without  interference  from  man,  as  the  product  of  favour- 
able coincidences  of  matter  and  force — a product  which,  from 
the  teleological  human  standpoint,  we  should  call  accidental 
Thus  originate  fruitful  islands  in  the  courses  of  streams ; thus 
the  grass  on  natural  pastures  and  prairies ; thus  berries  and 
trees  of  the  wood ; thus  deposits  of  useful  minerals.  But . 
thnngb  in  this  way  accident  does  much  for  man  it  does  not, 
do  nearly  enough.  In  nature  left  to  herself  we  have  on  a 
large  scale  what  we  should  have  on  a small  one  if  we  wished 
to  make  a definite  picture  out.  of  coloured  bits  of  stone,  and, 
instead  of  piecing  the  picture  together  deliberately,  were  to 
put  the  bits  of  stone  into  a kaleidoscope  and  wait  till  accident 


12 


MAN  AND  NA  DURE 


BOOK  I 


shook  the  planless  stones  into  the  wislied-for  picture.  Among 
the  infinite  number  of  ways  in  which  the  worlcing  materials 
and  powers  might  combine  there  are,  in  the  one  case  as  in  the 
other,  a countless  number  of  possible  effects,  but  only  a few 
favourable  ones ; and  in  the  natural  undisturbed  course  of 
things  these  few  turn  up  too  seldom  for  man,  with  all  his 
wants,  to  rest  content  with  them,  ^^ccordingly  he  inte^pose^s 
another  factor  in  the  natural  -process,  his  own  consciously 
\ ^directed  energies — he  begins  to  produce  the  goods  he 
requires. 

To  “ produce  ” : what  does  this  mean  ? It  has  been  so 
often  said  by_econojnists  that  the  creation  of  goods  is  not  the 
bringing  into  existence  of  materials  that  hitherto  have  not 
existed — is  not  “ creation  ” in  the  true  sense  of  the  word, — 
but  only  a fashioning  of  imperishable,  matter . ,into  more 
advantageous  shapes,  that  it  is  quite  unnecessary  to  say  it 
again.  More  accurate,  but  still  exposed  to  misinterpretatibh, 
is  the  expression  that  in  production  natural  powers  are  the 
^ servants  of  man,  and  are  directed  by  him  to  his  own  advantage. 
If  this  proposition  be  taken  to  mean  that  man  in  any  case  can 
impose  his  sovereign  will  in  place  of  natural  laws^  can  at  wiU 
“ bully  ” natural  law  into  making  a single  exception  at  his 
bidding,  it  is  entirely  eiToneous.  Whether  the  lord  of  creation 
will  it  or  no,  not  an  atom  of  matter  can,  for  a single  moment 
or  by  a hair’s  breadth,  work  otherwise  than  the  unchangeable 
laws  of  nature  demand.  Man’s  role  in  production  is  much 
more  modest.  It  consists  simply  in  this — that  he,  himself  a 
part  of  the  natui’al  world,  combines  his  personal  powers  with 
‘ the  impersonal  powers  of  nature,  and  combines  them  in  such 
a way  that  under  natural  law  the  co-operation  results  in  a 
definite,  desired,  material  form.  Thus— potwikbstanding  tha 

j interference  of  man,  the  origin  of  goods  remains  purely.- a 
natural  process.  The  natural  process  is  not  disturbed  by  man 
) but  completed,  inasmuch  as,  by  apt  intervention  of  his  own 
natural  powers,  he  supphes  a condition  which  has  hitherto 
been  wanting  to  the  origination  of  a material  good. 

If  we  look  more  closely  at  the  way  in  which  man  assists 
natural  processes,  we  find  that  his  snip  but  ample  contribution 
consists  in  the  moving  of  things.  “ Ihitting  objects  in  motion  ” 
is  the  idea  which  gives  the  key  to  all  human  production 


CHAP.  I 


PRODUCTION 


13 


and  its  results ; — to  all  man’s  mastery  over  nature  add  its 
powers.^  And  this  is  so  simply  because  the  powers  reside 
ill  the  objects.  T^ow.  when  man  bv  his  physical  powers — the 
power  of  moving  thinp;s — is  able  in  dip.ta.tP!  'inhp.rp,  the  object 
shall  be,  he  obtains  a control  over  the  place  at  which  a natural 
power  may  become  effective ; and  this  means  broadly  a control 
over  the  wav  and  over  the  time_  in  which  it  may  become 
effectiye. 

I sav  a control  over  the  wav  in  wbicb  a.  natural  powey 
may  become  effective.  Of  course  a pound  weight  acts  as  a 
pound  weight  and  never  in  any  other  way ; whether  it  be  a 
paper  weight  on  a writing-table,  or  a counterpoise  on  a scale- 
beam,  or  whether  it  keep  down  the  valve  of  a steam-engine,  it 
never  ceases  to  exert  the  force  of  gravitation  with  which  its 
mass  is  endowed.  But  just  because  the  expression  of  one  and 
the  same  natural  power  always  remains  the  same,  results  that  n.rp, 
extraordinarily  different  mav  be  obtained  by  getting  it  to  work 
in  different  combinations- — just  as  by  adding  like  to  unlike  a 
different  sum  may  be  got  every  time.  And  so  our  pound 
weight,  while  in  itself  constantly  acting  with  perfect  uniformity, 
will,  according  to  the  different  surroundings  in  which  we  place 
it,  sometimes  hold  together  a heap  of  papers  on  a writing-table, 
sometimes  indicate  the  weight  of  another  object,  sometimes 
regulate  the  pressure  of  steam  in  the  boiler. 

Again  T say  a control  over  the,  time  in  which  a natural 
power  may  become  effective.  This  proposition,  also,  must  not 
be  taken  too  literally.  It  must  not  be  imagined  that  natural 
powers  work  intermittently ; that  man  can  sometimes  bring 
them  to  a standstill,  sometimes  set  them  working  agaim  On 
thfer  contrary^  natural  powers  are  always  at  work;  a natural 

power  not  active  would  be  a contradiction  in  terms.  But  it 
is  possible  that  several  powers  mav  be  so  combined  that  tbe.ir 
activities. may  for  a time  mutuaUv  balance  each  other,  and  the 
resultant  be  rest- — if  not  complete  rest,  still  some  movement  so 
slight  that,  as  regards  human  purposes,  it  may  be  neglected. 
i^Tien  this  is  the  case,  before  any  new  resultant  can  emerge 
that  is  of  interest  to  man,  there  must  be  an  entirely  different 
.combination  of  materials  and  powers.  This  suggests  hoAv  man 
may  get  control  of  the  point  of  time  at  which  a definite  resultant 

^ See  Mill’s  Principles,  i.  1.  2. 


14 


MAN  AND  NATURE 


BOOK  I 


emerges.  It  is  only  necessary  for  him,  by  skilful  use  of  his 
power  to  ^ove  objects,  to  provide  the  causes  of  the  desired 
effect,  all  hut  one.  So  long  as  this  one  is  not  present  the 
conditions  are  unfulfilled,  and  there  cannot  be  the  desired 
result.  But  when  at  the  proper  moment  he  adds  the  last 
c.rmdi±,inT),  the  Tpovement  hitherto  held  in  leash,  as  it  were, 
ia  suddenly  set  free,  and  the  desired  effect  is  obtained  at 
the  opportune  time.  Thus  the  sportsman  moves  powder  and 
lead  into  the  barrel  of  the  gun ; he  shuts  the  breech ; he 
raises  the  cock.  Each  of  these  things  has  for  long  possessed 
and  expressed  its  peculiar  powers.  In  the  powder  are  pre- 
sent the  molecular  powers  whose  energy  later  on  is  to  expel 
the  shot  from  the  barrel.  The  barrel  now,  as  formerly,  exerts 
^ts  forces  of  cohesion  and  resistance.  The  trigger  which  is 
to  let  the  cock  smash  down,  strains  and  presses  against  the 
spring.  Still  the  arrangement,  the  disposition  of  the  collective 
powers,  is  such  that  the  resultant  of  their  mutual  energies  is 
rest.  But  the  sportsman  covers  the  wild  fowl  with  the  barrel: 
there  is  a slight  pressure  on  the  tongue,  a Little  dislocation  of 
the  arrangements,  and  the  f^^but  flics  ^ 

^ If  we  were  to  carry  our  analysis  of  what  man  does  in  production  a step 
further,  we  might  approuriatelv  distinguish  three  fundamental  wavs  in  whiej^ 
the  prodiicinp-  man  “moves  things.”  The  fi.r.gjt  is^hat,  for  want  of  a better 
name,  we  may  call  simple  movements  or  changes  of  plage — where  men  transport 
_jntire-®bjects  from  one  locality  to  another.  Thus  the  miner  brings  the  ore  from 
the  depths  of  the  shaft  to  the  upper  air  ; the  merchant  takes  his  goods  from  the 
place  where  they  are  produced  to  the  place  where  they  are  demanded  and  used. 
The  secQftd—embraees- those  movements  of  parts  of  one  and  the  same  object 
whereby  it  experiences  a change  of  forna,  as  when  nails  are  made  from  iron, 
statues  from  marble,  pipes  from  clay,  dials  from  ivory,  combs  from  caoutchouc, 
tumblers  from  glass,  furniture  from  wood.  The  third,  and  much  the  most 
common  way,  i.s  where  difl’erent  objects  are  brougkvdw^her-ifi-space  to  form 
combinations  of  matter.  These  combinations  may  be  merely  temporary,  or  they 
may  be  lasting.  Instances  of  the  one  are  where  the  stamp  falls  on  the  coin, 
the  chisel  chips  at  the  marble,  the  carving  tool  is  applied  to  the  wood,  the  ore 
put  into  the  furnace,  the  yarn  into  the  loom,  the  paper  under  the  printing  press, 
the  stuff  under  the  shears,  the  plough  through  the  clods.  Instances  of  the 
other  are  where  we  build  a house  out  of  wood,  stone,  lime,  iron,  etc.  ; where 
we  put  together  a watch  out  of  wheels,  springs,  pendula,  weignts,  stop-action 
and  many  other  things ; in  fact  in  manufacture  generally.  I must  warn  the 
reader  that  this  division  into  three  fundamental  forms  neither  has,  nor  is  meant 
to  have,  the  character  of  strict  scientific  classification.  Indeed,  these  forms  merge 
in  many  instances  into  one  another.  Temporary  combinations,  for  instance,  are 
very  often  half-way  to  changes  of  form,  and  what  I have  called  a simple  change 


CHAP,  1 


MAN’S  ALLIES  IN  PRODUCTION 


15 


The  same  considerations  which  show  us  the  kind  of 
mastery  man  has  over  nature  show  us  at  the  samp,  timp.  the 
measure  and  the  narrow  limits  of  his  mastery.  As  we  have 
seen,  man  has  a certain  power  to  make  natural  forces  act  where, 
when,  and  how  he  will ; but  this  power  he  possesses  only  in  so 
far  as  he  can  control  the  matter  in  which  these  forces  reside. 
Now  the  masses  of  matter,  and  therefore  the  masses  of  inert 
resistance,  which  have  to  be  overcome  before  our  purposes  are 
served,  are  often  immense,  while  the  physical  force  which  is  at 
our  command  is  very  modest  and  comparatively  trifling.  Often, 
on  the  other  hand,  the  matter  is  too  fine  to  be  manipulated 
by  our  rude  hand.  Our  interests  often  call  for  infinitely 
delicate  rearrangements  of  infinitely  small  pieces,  and  how 
un  suited  are  our  clumsy  fingers  to  deal  with  molecules  and 
atoms ! How  entirely  incapable  is  the  human  hand  of  im- 
itating even  one  of  those  wonderfully  dehcate  cellular  tissues 
which  nature  flings  out  in  thousandfold,  every  day,  in  every 
plant  and  leaf!  Thus  human  pow^pg  at-p.  fimibly  defieient : 
they  are  too  slight  as  against  the  mass,  too  rude  as  against  the 
structure  of  the  matter  which  they  have  to  subdue. 

In  those  circumstances  we  should  be  very  badly  off  for 
the  wherewithal  of  production  if  we  had  not' some  real  allies 
bebiml  these  doubly  insuflScient  powers.  One  of  these  aUief} 
is  the  human  mind.  In  investigating  the  causal  rela5idn"6T" 
things wvu  come "tCT'kilow  the  natural  conditions  under  which 
the  desired  goods  come  into  existence : we  thus  come  to  learn 
where  human  force  can  be  applied  with  advantage  and  where 
not;  and  thus  we  are  taught  to  avoid  exertions  which  are 
barren  and  choose  .those  which  are  profitable.  Human  power 
so  directed  is  like  a small  but  well-officered  army,  which  makes 
up  in  mobility,  cohesion,  and  energetic  use  of  opportunity, 


of  place  is  at  the  same  time,  in  a certain  point  of  view,  a material  combination, 
a bringing  together  of  the  thing  moved  and  the  object  (personal  or  impersonal) 
to  which  it  is  moved.  This  division,  however,  will  make  it  easier  to  find  our 
reckoning,  and  will  prove  too,  if  necessary,  the  correctness  of  the  general  char- 
acteristics which  I have  ascribed  in  the  text  to  productive  processes.  I mean  to 
say  that  it  is  easy  to  see  that  every  productive  activity  which  one  can  think  _Qf 
ranges  itself  under  some  one  of  these  three  fundamental  forms,  and  to  that  extent 
it  is  proved  that  such  an  activity  must;  a fortiori,  range  itself  also  under  the 
general  formula  given  in  the  text,  where  ve  have  described  the  nature  and  method 
of  the  production  of  material  goods  as  the  mastery  of  natural  powers  by  means 
of  putting  objects  in  motion. 


16 


MAN  AND  NATURE 


BOOK  I 


what  it  wauts  in  ntimbers.  ^ni^ther  powerful  ally  in  tho 
struprple  against  nature  is  nature  herself.  All  tliat  we  are  able 
to  do  in  production  would  be  wretchedly  small  were  it  not 
that,  in  the  storehouse  of  nature,  we  find  the  means  of  dividjug 
nature  a.ppjjrstdtersel-f  and  setting  force  .again  stJbice.  But  here 
we  touch  on  a subject  which  is,  in  itself,  too  important,  par- 
ticularly as  regards  our  inquiry,  to  admit  of  merely  a passing 
mention 


CHAPTER  II 


THE  NATURE  OF  CAPITAL 

The  end  and  aim  of  all  production  is  the  making  of  things 

with  which  to  satisfy  our  wants : that  is  to  say,  the  making 
of  goods  for  immediate  consmnption,  or  Consmnption  Goodsd 
The  method  of  their  production  we  have  already  looked  at  m a 
general  way.  We  combine  our  own  natural  powers  and  natural 
powers  of  the  external  world  in  such  a way  that,  under  natural 
law',  the  desired  material  good  must  come  into  existence.  But 
this  is  a very  general  description  indeed  o'f  the  matter,  and 
looking  at  it  closer  there  comes  in  sight  an  important  distinc- 
tion which  we  have  not  as  yet  considered.  It^has  reference 
to  the  distance  which  lies  between  the  expenditure  of  human 

l^nnr  in  the  comhiued  production  and  the  appearance  of  the 
desired  good.  We  either  put  forth  our  labour  just  before^ 
the  goal  is  reached,  or  we,  intentionally,  take  a roundabout  I 
way.  That  is  to  say,  we  may  put  forth  our  labour  in  such  su 
way  that  it  at  once  completes  the  circle  of  conditions  neces- 
sary for  the  emergence  of  the  desired  good,  and  thus  the 
existence  of  the  good  immediatdy  follnwa  the  expenditure  of 
the  labour ; or  we  may  associate "ourTahour  first  with  the  more 
remote  causes  of  the  good,  with  the  object  of  obtaining,  not 
the  desired  good  itself,  but  a proximate  cause  of  the  good ; 
which  cause,  again,  must  be  associated  with  other  suitable 

^ Menger  has  suggestively  called  these  Good.s  of  the  First  lianh,  classing  all 
goods  which  go  to  their  production  as  Goods  of  Higher  Rank.  It  is  unfortunate 
that  we  cannot  use  the  literal  English  equivalent  of  the  “ Genussguter,”  but,  as 
next  to  it  in  convenience,  I propose  to  use  the  expression  Consumption  Goods  for 
what  otherwise  we  should  have  to  translate  as  Goods  for  Immediate  Consumption. 
See  Monger’s  Gruvdsdtze,  p.  8,  and  Bohra- Bawerk’s  Rcchte  uvd  Verhdltnisse, 
p,  101.  — W.  S. 

C 


18 


THE  NATURE  OE  CAPITAL 


BOOK  I 


materials  and  powers,  till,  finally, — perhaps  through  a consider- 
able number  of  intermediate  members, — the  finished  good,  the 
instrument  of  human  satisfaction,  is  obtained. 

The  nature  and  importance  of  this  distinction  will  be  best 
seen  from  a few  examples  ; and,  as  these  will,  to  a considerable 
extent,  form  a demonstration  of  what  is  really  one  of  the  most 
fundamental  propositions  in  our  theory.  I must  risk  being  tedious. 

A peasant  requires  drinking  water.  The  spring  is  some 
distance  from  his  house.  There  are  various  ways  in  which  he 
may  supply  his  daily  wants.  First,  he  mav  go  to  the  .spring 
each  time  he  is  thirsty,  and  drink  out  of  his  hollowed  hand. 
This  is  the  most  direct  way ; satisfaction  follows  hnmediately 
on  exertion.  But  it  is  an  inconvenient  way,  for  our  peasant 
has  to  take  his  way  to  the  well  as  often  as  he  is  thirsty.  And 
it  is  an  insufficient  way,  for  he  can  never  collect  and  store  any 
great  quantity  such  as  he  requires  for  various  other  purposes. 
Second,  he  may  take  a log  of  wood,  hollow  it  out  into  a kind 
of  pail,  and  pprry  hi.^  da,v’R  .'^upplv  from  the  spring  to  his 
cottage.  The  advantage  is  obvious,  but  it  necessitates  a 
roundabout  way  of  considerable  length.  The  man  must  spend, 
perhaps,  a day  in  cutting  out  the  pail ; before  doing  so  he 
must  have  felled  a tree  in  the  forest ; to  do  this,  again,  he 
must  have  made  an  axe,  and  so  on.  But  there  is  still  a third 
' way ; instead  of  felling  one  tree  he  fells  a number  of  ti’ees,  sphts 
and  hollows  them,  lays  them  end  for  end,  and  so  constructs 
a runnel  or  rhone  which  brings  a full  head  of  water  to  his 
cottage.  Here,  obviously,  between  the  expenditure  of  the 
labour  and  the  obtaining  of  the  water  we  have  a very  round- 
about way,  but,  then,  the  result  is  ever  so  much  greater.  Our 
peasant  needs  no  longer  take  his  weary  way  from  house  to  well 
with  the  heavy  pail  on  his  shoulder,  and  yet  he  has  a constant 
and  full  supply  of  the  freshest  water  at  his  very  door. 

Another  example.  I reqtrire  stone  for  building  a house. 
There  is  a rich  vein  of  excellent  sandstone  in  a neighbouring 
hill.  How  is  it  to  be  got  out  ? First,  I may  work  the  lon.qp. 
^stones  back  and  forward  with  my  bare  fingers,  and  break  off 
what  can  be  broken  off.  This  is  the  most  direct,  but  also 
the  least  productive  way.  Second.  Lmgay-Aake  a piece  of 
' irorr  ma.ke  a hammer  and  chisel  out  of.  it,  and  use  them  on 
the  hard  stone — a roundabout  way,  which,  of  course,  leads  to 


CHAP.  II 


THE  ROUNDABOUT  METHOD 


19 


a very  much  better  result  than  the  former.  Third  method — - 
Having  a hammer  and  chisel  I use  them  to  drill  a hole  in  the~ 
rock ; next  I turn  my  attention  to  procuring  charcoal,  sulphui’, 
and  nitre,  and  mixing  them  in  a,  powder,  then  I pour  the 
powder  into  the  hole,  and  the  explosion  that  follows  spht.^  the 
Rtnnp.  into  convenient  pieces — still  more  of  a roundabout  way, 
but  one  which,  as  experience  shows,  is  as  much  superior  to  the 
second  way  in  result  as  the  second  was  to  the  first. 

Yet  another  example.  I am  short-sighted,  and  wish  to 
have  a pair  of  spectacles.  For  this  I require  ground  and 
pohshed  glasses,  and  a steel  framework.  But  all  that  nature 
offers  towards  that  end  is  silicious  earth  and  iron  ore.  How 
am  I to  transform  these  into  spectacles  ? Work  as  I may,  it 
is  as  impossible  for  me  ^to  make  spectacles  directly  out  of 
sihcious  earth  as  it  would  be  to  make  the  steel  frames  out  of 
iron  ore.  Here  there  is  no  immediate  or  direct  method  of 
production.  There  is  nothing  for  it  but  to  take  the  round- 
about way,  and,  indeed,  a very  roundabout  way.  I must  take 
sihcious  earth  and  fuel,  and  build  furnaces  for  smelting  the 
glass  from  the  sihcious  earth ; the  glass  thus  obtained  has  to 
be  carefuhy  purified,  worked,  and  cooled  by  a series  of  pro- 
cesses ; finally,  the  glass  thus  prepared — again  by  means  of 
ingenious  instruments  carefuhy  constructed  beforehand — is 
ground  and  pohshed  into  the  lens  fit  for  short-sighted  eyes. 
Simharly,  I must  smelt  the  ore  in  the  blast  furnace,  change 
the  raw  iron  into  steel,  and  make  the  frame  therefrom — 
processes  which  cannot  be  carried  through  without  a long 
series  of  tools  and  buildings  that,  on  their  part  again,  require 
great  amounts  of  ’ previous  labour.  Thus,  by  an  exceedingly^ 
roundabout  wav,  the  end  is  attained. 

The  lesson  to  be  drawn  from  all  these  examples  alike  is 
obvious.  It  is — that  a greater  result  is  obtained  by  producing 
goods  in  roundabout  ways  than  by  producing  them  directly. 
AYhere  a good  can  be  produced  in  either  way,  we  have  the  I 
fact  that,  by  the  indirect  way,  a greater  product  can  be  gotj 
with  equal  labour,  or  the  same  product  with  less  labour.  But! 
beyond  this,  the  superiority  of  the  indirect  way  manifests  itselif 
in  being  the  only  way  in  which  certain  goods  can  be  obtained'. 

if  I might  say  so,  it  is  so  much  the  better  that  it  is  often  the 
•only  way ! 


20 


THE  NA  TURE  OF  CAPITAL 


BOOK  I 


J That  roundaljDiit  methods  lead  to  greater..ji:esults  than 
direct  methods  is  one  of  the  most  important  and  fundamental 
/propositions  in  the  whole  theory  of  production  It  must  be 


emphatically  stated  that  the  only  basis  of  this  proposition 
is  the  experience  of  practical  life.  Economic  theory  does 
not  and  cannot  show  a 'priori  that  it  must  be  so ; but  the 
unanimous  experience  of  all  the  technique  of  production  says 
that  it  is  so.  And  this  is  sufficient ; aU  the  more  that  the 
facts  of  experience  which  tell  us  this  are  commonplace  and 
familiar  to  everybody.  But  whv  is  it  so  ? The  economi.st 
j might  quite  well  decline  to  answer  this  question.  For  the 
/ fact  that  a greater  product  is  obtained  by  methods  of  produc- 
tion that  begin  far  back  is  essentially  a purely  technical  fact, 
and  to  explain  questions  of  technique  does  not  fall  within  the 
economist’s  sphere.  For  instance,  that  tropical  lands  are  more 
fruitful  than  the  polar  zone ; that  the  alloy  of  which  coins  is 
made  stands  more  wear  and  tear  than  pure  metal ; that  a rail- 
road is  better  for  transport  than  an  ordinary  turnpike  road ; — 
all  these  are  matters  of  fact  with  which  the  economist  reckons, 
but  which  his  science  does  not  call  on  him  to  explain.  But 
this  is  exactly  one  of  those  cases  where,  in  the  economist’s  own 
interest — the  interest  he  has  in  limiting  and  defining  his  own 
task — it  is  exceedingly  desirable  to  go  bevond_ the  specific 
economic  sphere.  If  the  sober  physical  truth  is  once  made 
clear,  political  economy  cannot  indulge  in  any  fancies  or 
fictions  about  it ; and,  in  such  questions,  political  economy  has 
never  been  behind  in  the  desire  and  the  attempt  to  substitute 
its  own  imaginings .!  Although,  then,  this  law  is  already  suffi- 
ciently accredited  by  experience.  I attach  particular  value  to,. 
explaining  its  causj^  and,  after  what  has  been  said  as  to  the 
nature  of  production,  this  should  not  be  very  difficult. 

In  the  last  resort  all  our  productive  efforts  amount  to 
shiftings  and  combinations  of  matter.  We  must  know  how  to 
bring  together  the  right  forms  of  matter  at  the  right  moment, 
in  order  that  from  those  associated  forces  the-  desired  result, 
the  product  wanted,  may  follow.  But,  as  wp  s^rW,  the  na.f.nral 
forms  of  niatter  are  often  so  infinitely  large., often  so  infinitely 
fine,  that  h\iman  hands  are  too  weak  or  too  coarse  to  control 
them.  W'e  are  as  powerless  to  overcome  the  cohesion  of  the 
wall  of  rock  when  we  want  building  scone  as  we  are,  from 


CHAP.  II 


THE  ROUNDABOUT  METHOD 


21 


carbon,  nitrogen,  hydrogen,  oxygen,  phosphor,  potash,  etc.,  to 
put  together  a single  grain  of  wheat.  But  there  are  other 
powers  which  can  easily  do  what  is  denied  to  us.  and  these  are 
the  powers  of  nature.  There  are  natural  powers  which  far 
exceed  the  possibilities  of  human  power  in  greatness,  and  there 
are  other  natural  powers  in  the  microscopic  world  which  can 
make  combinations  that  put  our  clumsy  fingers  to  shame.  1£ 
we  can  succeed  in  making  those  forces  our  allies  in  the  work 

of  production-  the  limits  of  human  possibility  will  be  infinitely 
extended.  And  this  we  have  done. 

The,  condition  of  our  success  is,  that  we  are  able  to,  non,- 1 
trol  the  materials  on  wliich  the  power  that  helps  us  depends.  I 
more  ea.sily  than  the  materials  which_arfi_tQJhe  transformed  iutoj 
the  desired  good.  Happily  tliis,  condition  can  be  very  often 
complied  with.  Our  weak  yielding  hand  cannot  overcome  the 
cohesion  of  the  rock,  but  the  hard  wedge  of  iron  can  ; the  wedge 
and  the  hammer  to  drive  it  we  can  happily  master  with  little 
trouble.  We  cannot  gather  the  atoms  of  phosphorus  and  / 
potash  out  of  the  ground,  and  the  atoms  of  carbon  and  oxygen/ 
out  of  the  atmospheric  air,  and  put  them  together  in  the  shape/ 
of  the  corn  of  wheat ; but  the  organic  chemical  powers  of  thei 
seed  can  put  this  magical  process  in  motion,  while  we  on  our  partj 
can  very  easily  bury  the  seed  in  the  place  of  its  secret  working; 
the  bosom  of  the  earth.  Often,  of  course,  we  are  not  able 
directly  to  master  the  form  of  matter  on  which  the  friendly 
power  depends,  but  in  the  same  way  as  we  would  like  it  to 
help  us,  do  we  help  ourselves  against  it ; we  trv  to  secure  the 
alliance  of  a second  natural  power  which  brings  the  form  of 

matter  that'jbears' the  first  power  under  our  control.  We  wish 
to~Bnng  the  well  water  into  the  house,  p Wooden  rhones  would 
force  it  to  obey  our  will,  and  take  the  path  we  prescribe,  but 
our  hands  have  not  the  power  to  make  the  forest  trees  into 
rhones.  We  have  not  far  to  look,  however,  for  an  expedient. 
r^e  ask  the  help  of  a second  ally  in  the  axe  and  the  gouge ; 
their  assistance  gives  us  the  rhones  the  rhones  bring  us 

the  water.  And  what  in  this  illustration  is  done  through  the 
mediation  of  two  or  three  members  may  be  done,  with  equal 
or  greater  result,  through  five,  ten,  or  twenty  members.  Just 
as  we  control  and  guide  the  immediate  matter  of  which  the 
good  is  composed  by  one  friendly  power^  and  that  power  by  a 


22 


THE  NATURE  OF  CAPITAL 


BOOK  I 


second,  so  can  we  control  and  guide  the  second  bv  a third,  t-.he 
thirdly  a fourth,  this,  again,  by  a fifth,  and  so  on. — always 
going  back  to  more  remote  causes  of  the  final  result — till  in 
the  series  we  come  at  last  to  one  cause  which  we  can  control 
c-onveniently  by  our  own  natural  powers.  This  is  the  true 
importance  which  attaches  to  our  entering  on  roundabout  ways 
of  production,  and  this  is  the  reason  of  the  result  associated 
with  them  ; every  roundabout  wav  means  the  enlisting  in  our 
service  of  a power  which  is  stronger  or  more  cunning  than  the 
human  hand ; every  extension  of  the  roundabout  way  means 
an  addition  to  the  powers  which  enter  into  the  service  of  man, 
and  the  shifting  of  some  portion  of  the  burden  of  production 
from  the  scarce  and  costly  labour  of  human  beings  to  the 
prodigal  powers  of  nature 

And  now  we  may  put  into  words  an  idea  which  has  long 
waited  for  expression,  and  must  certainly  have  occurred  to  the 
reader ; the  kind  of  production  whiclL  works  in  these  wise 
circuitous  methods  is  nothing  else  than  what  economistS-Call 
Ca,pita.b'f^|;  Production,  as  opposed  to  that  production  which 
goes  directly  at  its  object,  as  the  Germans  say,  “■'init  (hr  nackten 
Famt.”'^  And  Capital  is  nothing  but  the  complex  of  interm^iate 
products  wfeeh  appear  on  the  several  stages  of  the  roundabout 
journey. 

It  is  in  this  way  I interpret  the  most  important  funda- 
mental conception  in  the  theory  of  capital,  and  I should  be 
very  glad  to  stop  here.  But,  like  so  many  another  conception 
in  the  theory  of  capital,  this  conception  of  capital  itself  ba§ 
become  a veritable  apple  of  discord  to  the  theorists.  A per- 
fectly amazing  number  of  divergent  interpretations  here  con- 
front each  other,  and  block  the  approach  to  the  theory  of 
capital  with  one  of  the  most  vexatious  controversies  in  which 
o\m  science  could  be  involved.  This  uncertainty  as  to  the 
conception  of  capital,  bad  enough  in  itself,  becomes  worse  in 
proportion  as  Capital  gives  modern  science  new  questions  to 
consider  and  discuss.  It  is  certainly  very  unfortunate  when  a 

^ The  expression  Capitalist  Production  is  generally  used  in  one  of  two  senses. 
1 1 designates  either  a production  whieh  avails  itself  of  the  assistance  of  CQUcrele 
capital  (raw  materials,  tools,  machinery,  etc.),  or  a production  carried  on  for 
the  behoof  and  under  the  control  of  private  capitalist  undertakers.  The  one  is 
not  by  any  means  coincident  with  the  other.  I always  use  the  expression  in 
theJjormer  of  these  two  meanings. 


CHAP.  II 


CAPITALIST  PRODUCTION 


23 


science  already  earnestly,  even  acrimoniously  engaged  on  the 
solution  of  questions  which  affect  society  to  its  depths, — 
questions  which  all  the  world  knows,  ponders,  and  discusses  as 
the  great  “ problems  of  capital,” — is  struck,  as  it  were,  by  a 
second  confusion  of  tongues,  and  becomes  involved  in  an  eurj- 
less  wrangle  as  to  what  kind  of  thing  it  is  that  properly  is 

called  Capital ! Such  a controversy  at  such  a point  is  more 
than  embarrassing ; it  is  a calamity ; and  has  been  foimd  so  in 
the  history  of  Political  Economy.  Almost  every  year  there 
appears  some  new  attempt  to  Settle  the  disputed  conception, 
but,  unfortunately,  no  authoritative  result  has  as  yet  followed 

these  attempts.^  On  the  contrary,  many  of  them  have  only 
served  to  put  more  combatants  in  the  field  and  furnish  more 
matter  to  the  dispute. 

I confess  that,  to  me,  the  settlement  of  the  real  nroblems 

connected  with  the  name  of  capital  seems  more  important. 

and  certainly  is  more  attractive,  than  the  cataloguing  of  con- 
troversies as  to  the  proper  usp.._Q£JJre-wor(l  All  the  same  the 
fact  remains  that  the  confusion  about  the  name  has  brought 
a great  amount  of  confusion. into  the  matter ; and,  again,  it 
might  be  open  to  misconstruction — and  not  without  reason, — 
if  the  author  of  a somewhat  comprehensive  work  on  capital 
were  to  pass  over  the  discussion  of  what  is  certainly  the  most 
noisy,  if  not  the  most  weighty  controversy  about  capital.  On 
these  two  accounts  I feel  obliged  again  to  trend  tbe  heated 
path  of  controversy,  in  the  hope  that  impartial  and  sober 
inquiry  into  the  matter  hi  dispute  may  succeed  in  ending  it. 

^ Looking  back  over  the  last  few  years  only,  I can  recall,  as  coming  in  quick 
succession,  the  researches  of  Knies  {Bos  Geld,  Berlin,  1873,  pp.  1-56) ; of  Cossa 
{La  Nozione  del  Capitale,  1874,  published  in  the  Saggi  di  Econom/ia  Politica, 
Milan,  1878) ; of  Eicca-Salerno  {Sulla  Teoria  del  Capitale,  Milan,  1877)  ; of 
Umpfenbach  {Bas  Kapital  in  seiner  Kulturhedeutung,  Wiirzburg,  1879)  ; of 
Kiihnast  ( Ueher  den  rechtlichen  Begriff  des  Kapitales  in  Beitrdge  zur  Erlduterung 
des  BeiUschen  Bechtes,  1884) ; of  Supino  {II  Capitale  nell’  Organismo  Economico 
e nell'  Econmnia  Politica,  Milan,  1886).  Meanwhile  we  have  the  well-known 
works  of  Rodbertus  and  Marx,  both  bearing  the  title  Bas  Capital,  and  again  the 
elaborate  statements  in  the  more  comprehensive  systems,  particularly  those  of 
Wagner  {Grundlegung,  second  edition,  1879,  p.  36);  of  Eleinwachter  (Schbnberg’s 
first  edition,  p.  170  ; second  edition,  p.  206);  and  of  Cohn  {Grundlegung 
der  Nationalokonomie,  Stuttgart,  1885,  § 145-147). 


CHAPTEE  III 


HISTORICAL  DEVELOPMENT  OF  THE  CONCEPTION 

It  will  be  most  convenient  to  open  the  discussion  by  a his- 
torical survey  of  the  development  of  the  conception.^ 

Ori^nallv  the  word  Capital  ( Capitale  from  Cayut)  was  used 

to  sigpiify  the  Principal  of  a money  loan  {Capitalis  pars  cleliti) 
in  opposition'  to  the  Interest:'  This  usage,  already  fore- 
shadowed in  the  Greek  formation  Ket^aXatov,  became  firmly 
established  in  mediaeval^  Latin,  and  appears  to  have  remained 
the  prevailing  one- for  a-jvery  long  time,  even  pretty  far  down 
in  the  new  era.^  Here,  therefore,  Capital  meant  the  .same 
thing  a.a  “ an  interest-bearing  sum  of  money.” 

I In  the  meantime  the  disputes  which  had  arisen  over  the 
I legitimacy  or  illegitimacy  of  loan  interest  brought  about  an 
I essential  deepening  and  widening  of  the  conception.®—  Jt  bad 
become  apparent  that,  thp.  intore.Ht-bpAring  power  of  “ barren  ” 
money  wn.s  at  bottom  a borrowed  one — borrowed  from  the 
productive  power  of  things  that  the  money  could  buy.  Money 
only  gave  the  exchange  form — to  a certain  extent  the  out- 
ward garb — in  which  the  interest-bearing  things  passed  from 
hand  to  hand.  The  true  “ stock  ” or  parent  stem  which  bora 
interest  was  not  money  but  the  goods  that  were  got  for  it.  _ 
In  these  circumstances  the  obvious  course  was  so  to  change 
the  conception  that,  besides  embracing  the  representative 

1 See  on  this  subject  Knies,  Das  Geld,  Berlin,  1873,  p.  6 (second  edition,  p. 
24) ; Ricca-Salerno,  Sulla  Teoria  del  Capitale,  1877,  chap.  ii.  ; and  Schonberg’s 
Handbuch,  second  edition,  vol.  i.  p.  206. 

“ The  English  word  “Cattle,”  as  Knies  (p.  7)  has  rightly  remarked,  has 
nothing  in  common  derivatively  with  our  conception. 

^ Capital  and  Interest,  book  i.  chaps,  ii.  and  iii. 


CHAP,  in 


TURGOT 


25 


thing,  money,  it  would  emlirace  the  represented  thing  goods. 
And,  indeed,  popular  language  seems  to  have  made  this  change 
before  science  did.  At  least,  as  early  as  the  year  1678,  in  a 
glossary  of  that  year,  besides  the  meaning  of  a sum  of  money 
there  appears  this  further  interpretation  of  the  word  capital, 

“ Capitale  dicitur  bomim  orwne  quod  yossidetur.”  ^ But  science 
was  not  long  behind  in  sanctioning  the  adoption  of  the  con- 

ception. We  find  it  substantially  in  Hume  in  his  essay  onl 
Interest,  when  he  shows  that  the  rate  of  interest  altogether 
depends,  not  on  the  amount  of  money,  but  on  the  amount  of 
riches  or  stocks  available ; the  only  thing  wanting  is  that 
he  should  have  formally  callecT  these  riches  or  stocks  “ real  _ 
capitals.’*  This  formal  chan.o~e  was  finally  made  by  Turgot : 

“ Whoever,”  he  says  in  his  Reflexions  sur  la  Formation  et  la 
Distribution  dcs  Richesses,  “ gets  possession  of  more  goods  in  aJ 
year  than  he  requires  to  use,  can  lay  past  the  surplus,  and 
accumulate  it.  These  accumulated  goods  are  what  people  call 
Capital.  . . . It  is  absolutely  the  same  whether  this  sum  of 
goods,  or  this  Capital,  consists  of  a mass  of  metal,  or  of  other 
things,  since  money  represents  every  kind  of  goods,  just  as,  on 
the  other  side,  all  other  kinds  of  goods  represent  money.” 
Thus  Turgot  gave  the  second  reading  m historical  succession 
to  the  conception  of  capital 

It  was  very  soon  superseded  by  a third.  Bor  when  Turgot 
designated  all  saved  goods  mdiscrimihately  as  Capital,  he 
seemed  to  have  gone  too  far  in  broadening  the  conception. 
To  replace  the  word  “ money  ” in  the  definition  by  the  word 
“ goods  ” only  reflected,  indeed,  the  more  thorough  grasp  which 
was  now  taken  of  the  subject.  But  to  give  the  name  of 
Capital,  without  any  further  discriminatiorL to stocks  of 

goods,  was  to  give  up.  without  sufficient  reason,  the  second 
feature  in  the  old  conception,^ — the  reference  that  napitali 
had  to  a cap&,bihty  of  yielding  interest,  to  an  acquisition  or 
goods.  To  that  extent  Turgot’s  conception  of  capital  was 
only  in  part  a development  born  of  the  time : in  part  it 
was  an  entirely  new  reading  of  the  term ; a reading 
which,  at  the  same  time,  exposed  him  to  the  charge  that, 
without  due  cause,  he  had  neglected  the  very  suggestive 

^ Glossarium  of  Dufresne  du  Cange,  quoted  by  Umpfenbach,  Das  Kapital  in 
seiner  Kulturhedeutv/ng,  Wlirzburg,  1879,  p.  32. 


26 


DEVELOPMENT  OF  THE  CONCEPTION 


BOOK  I 


ditfereiices  there  are  between  goods  and  goods.  It  was  no 
* less  a man  than  Adam  Smith  who  changed  and  rectified 
/lurgot’s  definition.  The  “ saved  ” stocks,  he  said,  must  be. 
/ distinguished  as  containing  two  parts.^  One  portion  is 
{ destined  for  immediate  consumption,  and  gives  off  no  kind  of 
income ; the  other  portion  is  destined  to  hriiig  in  a.n  in  come  to 
its  owner,  and  this  part  alone  rightly  bears  the  name  of 
Capital. 

With  this  distinction,  however,  Adam  Smith  connected 
another  consideration,  which  was  destined  to  have  very  serious 
consequences  on  the  development  of  the  conception.  He 
I remarked  that  his  use  of  the  term  was  applicable.  -as__well 
‘ to  the  case  of  individuals  as  to  that  of  a whole  community^; 
I only,  with  this  shifting  of  the  standpoint,  the  group  of  things 
embraced  by  the  conception  was  also  somewhat  changed, 
Tndi\dduals,  that  is  to  say,  can  make  a gain,  not  only  by  the 
production  of  goods,  but  also  by  lending  to  other  individuals 
for  a consideration  goods  which  are  destined  in  themselves  to 


immediate  consumption,  such  as  houses,  masquerade  dresses, 
furniture,  etc.  But  the  community,  as  a whole,  cannot  enrich 
itself  otherwise  than  bv  the  production  of  new  goods.  Bor 

Itlie  community,  then,  the  conception  of  “ means  of  acquisi- 
tion ” coincides  with  the  otherwise  narrower  conception  of 
means  of  production.”  In  harmony  with  this  the  conception 
oi'  capital,  from  the  point  of  view  of  the  cornmnnity,  must  Ije 

limited  to  a cmnplex  of  the  means  of  production.  It  is  worth 
our  while  to  put  more  exactly  before  us  the  bearing  of  this 
insignificant  remark — which,  by  the  way,  in  Adam  Smith  is 
put  more  unpretentiously,  and  much  less  sharply,  than  in  the 
abstract  which  I have  given  of  his  meaning. 

First  of  all,  this-  was  the  beginning  of  the  uivision  of 

t auital  into  two  independent  conceptions  — the  conceptions 
afterwards  distinguished  as  hTp.ti'nna.l  fiapital  and  Individual 
Capital  Or,  to  indicate  the  relation  still  more  exactly,  the 
]jaren't'~cdnception  of  capital  as  a stock  of  goods  yielding- 
income  lived  on  under  the  designation  of  “ private  capital,” 
l)ut,  nnder  the  name  of  “national  capital.”  it  sent  outran 
(jffshoot  which  quickly  grew  t(  independent  importance.;  soon, 
i^eed,  to  greater  importance  than  the  parent  conception 


^ Wealth  of  Nations,  book  ii.  chap.  i. 


CHAP.  Ill  NATIONAI  AND  PRIVATE  CAPITAL 


27 


itself.  It  was  immediately  recognised  that  a very  notable 
importance  as  regards  nroduction  attached  to  that  class  of 
goods  which  people  now  began  to  call  capital  par  e^celhnce : 
and  this  became  the  occasion  of  a great  many  profitable 
applications  of  the  new  conception  to  the  theory  of  production. 
Thus  we  find  the  national  conception  in  a short  time  taking 
its  place  as  one  of  the  chief  fundamental  conceptions  of  that 
theory,  and  enga^d  in  those  very  important  problems  that 
are  now  associated  with  its  name.  In  the  triad.  Land.  Labour, 
and  Capital,  we  find  the  new  nnnppptinn  giving  its  name  to  one 
of  the  three  great  sources  of  wealth,  or,  as  it  was  put  later,  to 
one  of  the  three  factors  of  production. 

But  all  the  time,  in  virtue  of  the  old  parent  conception — 
that  known  later  as  Private  Capital — the  term  capital  remained.  I 
connected  with  the  phenomenon-of  interest,  which  belonged  to  I 
the  theory  of  distribution  or  income.  Thus,  from  that  time 
onward  appeared  the  peculiar  phenomenon  which  was  to  be 
the  source  of  so  many  errors  and  complications,  that  two 
series  of  fundamentally  different  phenomena  and  fundament- 
ally different  problems  were  treated  imder  the  same  name. 
Capital,  as  National  Capital,  became  the  central  figure  of  the 

weightiest'problems  of  Production : Pnvate  riapit-al^  of  fhc 

fuitdamregtaTly  -dfstinct  problem  of  Interest. 

In  view  of  this  it  becomes  of  consequence  to  state  clearly 
that  Adam  Smith’s  two  varieties  of  the  coimeption  of  capital 
are,  properly,  two "~^tirel^' independent  conceptions,  resting 
substantially  on  quite  different  foundations,  and  only  connected 
externally  by  a very  loose  bond.  As  chance,  however,  would 
have  it,  it  was  just  this  secondary  and  external  relation  that 
caused  the  name  to  be  given  to  the  younger  conception,  and 
brought  about  the.  identity  of  name  between  the  two.  The 
centre  of  gravity  of  the  conception  of  private  capital,  as  has 

been  pointed  out,  lies  in  the  acquisition  of  interest,  in  the 
chafacteristic  of  being  a source  of  inGom~e~:'  the'''cent're~6r  gfavdtv 
of  the~  conception  of  national  capital,  on  the~7ifTierliajid.  lies 

in  nroduction.  in  the  characteristic  of  "being  a tool  of  produc- 
tion ; sttld  the  loose  bond"  that  c/mnects  th'em.'is'^'the  acci- 
dental circumstance  that  the  goods  of  which  men  make  use 
iq  production  are  the  same  goods  as  are  the  source  of  profit  and 
interest  to  a people  considered  as  a whole,  and  are,  therefore. 


28 


DEVELOPMENT  OF  THE  CONCEPTION  book  i 


capital  in  the  original  sense.  Now  this  latter  reference  to 
income  gave  the  national  conception  of  capital  its-Jiame, 
but  it  was  very  far  from  giving  it  its  living  substansc 
This  was  fmmd  so  exclusively  in  the  relation  to  prodnctimi 
that,  in  a short  time,  the  formal  definition  of  capital  was 
based  upon  that  relation  alone.  It  was  defined  as  a^omple.v 
4)f  “ produced  means  of  production.”  and  such  like,  and  in  the 
/ end  it  scarcely  caused  any  misgiving  when,  on  closer  considera- 
tion, the  produced  means  of  production  seemed  never  to  be 
quite  identical  with  those  stocks  which  constitute  the  income- 
bearing  capital  of  a people.  For  there  can  be  no  question  that 
'communities  obtain  income  from  consumption  goods  loaned  to 
other  countries  against  interest.  When  this  ingongruity  was 
expressly  noted,  and  yet,  notwithstanding,  national  capital 
was  quietly  defined  as  a complex  of  means  of  production,  it 
('  amounted  to  a practical  and  emphatic  recognition  of  the  fact 
that  people  were  interested  in  capital  solely  on  account  of  its 
relations  to  production,  and  not  at  all  on  account  of  its 
accidental  characteristic  of  being  the  source  of  interest  to  the 
community.  To  put  it  shortly  : in  National  Capital  the  char- 
acteristic of  being  tlie  national  scairce  of  interest  came  to  t^ 
front  only  for  a moment,  but  this  moment  was  long  enough-tn 
attach  the  name  of  “ capital  ” to  it.  Scarcely  was  this  done 
when  the  eentre  of  gravity  was  shifted,  and  placed  in  its 
relation  to  production,  and  since  then  National  Capital  has 
been  looked  on  as  an  independent  conception,  substantially 
quite  foreign  to  its  namesake.  Private  Capital. 

Clearly  as  the  historian  of  economic  theory  may  now 
distinguish  between  these  conceptions  as  developed,  the  dis- 
tinction was  not  seen  at  the  time,  nor  for  long  afterwards^ 
With  Adam  Smith  himself  the  whole  matter  lies,  I might  say, 
in  embryo.  His  ideas  were  so  far  from  being  fixed  that  he 
could  occasionally  ascribe  to  them  meanings  which  were  quite 
distinct  from  and  did  not  at  aU  fit  in  with  the  fundamental 
conception.  An  instance  of  this  is-Jiis  extension._Df_  .tlia 
national  conception  to  aU  sorts  of  personal  properties,  tabenta. 

etc., — which  seem  a little  out  of  place  as  elements  of  a 
“ stock,”  and  which,  like  spirits  rashly  conjured,  banished  peace 
for  many  a long  day  from  the  theory  of  capital  This,  how- 
ever, is  an  episode  of  only  secondary  importanca  The  prin- 


CHAP.  Ill  NATIONAL  AND  PRIVATE  CAPITAL 


29 


cipal  point  is  that  the  followers  of  Adam  Smith  not  only  failed 
to  get  rid  of  the  confusion  in  which  he  had  left  the  conception 
of  capital,  but,  on  the  contrary,  positively  put  their  seal  to 
one  of  its  worst  mistakes.  They  did  not  notice  that,  in  what 
Adam  Smith  and  they  themselves  called  “ capital.”  there  were 

two  fundamentally  distinct  conceptions ; they  considered  the 
capital  of  which  they  spoke  in  the  theory  of  production  as 
identical  with  the  capital  which  bears  interest.  As  we  know, 
Adam  Smith  had  already  noticed'  that  there  was  a certain 
difference  in  the  meanings  usually  given  to  the  word  capital,  and 
that,  for  instance,  rented  houses,  hired  furniture,  or  masquerade 
dresses  were  capital  in  one  sense  and  not  in  another,  and  his 
followers  had  not  failed  to  loyally  transmit  the  remark.  But 
ob\dously  they  attached  no  importance  to  it, — what  was  the 
use  of  making  a fuss  about  a distinction  which  referred  only 
to  a few  hired  fancy  dinsses  and  such  like  ? — and  held  fast  by 
their  conceptmn  of  capital,  tbp.  far, tor  of  production  being 
canital.  the  source  of  interest.  And  now  one  confusion 
resulted  in  another.  Before,  it  was  the  conceptions  that  were 
mixed  ; now,  it  was  the  phenomena  and  the  problems.  Capital 
produces,  and  it  bears  interest.  Wha.f  more  natural  than  to 
gay  shortly  ; — it  bears  int'^st'  It  produces.  And  thus, 

introduced’ and  made  possible  "Sy  the  confusion  in  the  concep- 
tion of  capital,  originated  that  naive  and  one-sided  theor}'  of 
the  Productivity  of  capital  which,  from  Say’s  days  to  our  own, 
has  held,  and  still,  in  some  measure,  holds  economic  science 
iinder  its  baneful  influences.  The  Socialist  or  semi- socialist 
writers  of  our  time  were  the  first  to  face  in  earnest  the  con- 
fusion of  conceptions  by  distinguishing  capital  into  “ pure 
economic  capital,”  and  capital  as  a “ historico-legal  category.”  ^ 
This  distinction,  as  we  shall  see,  did  not  indeed  hit  the  nail 
on  the  head ; but  it  was  at  least  a distinction  which,  of 
necessity,  finally  distinguished  between  the  obiect  of  the  pro- 
duction problem  and  the  object  of  the  interest  problem,  and 
thus  paved  the  way  for  an  advance  in  the  treatment  of  the 
stni  viciously  confused  problems.  But  this  is  to  anticipate 
the  course  of  development : to  resume  the  methodical  narrative 
we  must  go  back  to  Adam  Smith. 

It  maY  be  said  that  Adam  Smith’s  fundamental  conception 
’ Kodbertus,  ; Wagner,  Grundlegung,  second  edition,  p.  39. 


30 


DEVELOPMENT  OF  THE  CONCEPTION 


BOOK  r 


was  never  afterwards  quite  neglected  ; the  relation  n£-ca.pital 
to  acquisition  and  to  productioiL  which  iu  opposition  to  Turgot 
he  had  again  imported  into  the  conception,  has,  in  some  form  or 
other,  been  retained  by  all  later  writers.  Qn  the  other  liand, 
it  very  soon  became  manifest  that,  within  the  common  funda- 
mental conception,  there  was  a surprismg  amount  of  latitude 
for  different  readings  of  it,  and,  as  it  chanced,  there  were  certain 
circumstances  which  very  much  favoured  the  taking  advantage 
of  this  latitude.  First  of  all,  economists  fell  heir  not  only 
to  the  fundamental  conception,  but  to  the  seed  of  ambiguity 
which  Adam  Smith  had  planted  in  it.  This  seed  now  burst 
into  full  life.  Almost  everybody,  entangled  in  the  confusian 
we  liave  pist  described,  thought  that  “ Capital  ” must  be  defined 
by  one,  uniting  conception.  But  the  one  party,  and  indeed 
theAhajority,  thought  more  about  the  instruments  of  prdduc- 
tion,  while  the  other  thought  more  about  the  source  of  income ; 
and  thus  they  attached  to  capital  the  characteristics  of  two. 
ditferent  conceptions.  This  was  one  fruitful  cause  of  divergent 
definitions,  but  there  was  another  still  more  fruitful  Whether 
the  theoretical  conception  of  capital  was  made  to  include  pro- 
ductive instruments  only,  or  whether,  more  liberally,  it  was  made 
to  embrace  acquisitive  instruments  as  well,  iu  any  case  there 
are  many  different  kinds  both  of  proAup.tivp  a.Tid  of  acquisitive_ 
instruments.  NoW,  in  proportion  as  economists  discovered 
more  similarities  or  more  contrasts  between  the  various  groups 
/ of  goods  which  serve  for  production  and  for  acquisition, 

' they  considered  it  appropriate  to  group  together,  under  the 
conception  which  they  called  capital,  sometimes  aU.  acquisitive 
or  all  productive  instruments  without  exception,  sometimes  only 
a certain  circle  of  the  same.  And  this  circle  again,  according 
to  the  tendencies  of  the  writer,  might  be  larger  or  smaller ; 
sometimes  of  moderate  dimensions,  and  sometimes,  again,  very 
closely  limited.  It  may  be  said,  indeed,  that  of  a.II, combina- 
tions and  permutations  which  were  logically  and  mathematically 
p.nnp.p.iva.blp.,  pcnnomirfl.]  sh'pupp  in  thisi_r.ase  was  not  spared 
one. 

Without  attempting  either  to  give  a complete  tale  of  these, 
or  to  keep  to  the  chronological  order,  I shall  shortly  coUocate 
the  more  important  of  them. 

bTumerous  writers  define  capital  as  a group  of  “products. 


CHAP,  in  HERMANN,  MENGER,  KLEINWACHTER 

tha,t  serve  towards  production.”  or  as  ^rmips  of  “ produced 
means~~^‘~pro3uctioii.”  This  conception,  which  is  expressly 
based  on  the  relation  of  capital  to  production,  excludes,  on  the 
one  hand,  land  (as  not  produced)  and,  on  the  other  hand,  all 
goods  that  serve  for  immediate  satisfaction  of  wants.  This 
conception  I have,  followed  in  defining  capital  as  a group  of 

Intermediate  Products.  In  so  far  as  it  is  not  so  much  an 
alteration  as  a more  distinct  formulation  of  Adam  Smith’s 
(national)  conception,  I do  not  reckon  it  an  independent 
variation. 

The  variation  which  Tifrinnuri,  however,  has  given  must 
be  considered  an  independent  one,  and  is  the  fourth  reiidiug  in 
arithmetical  order  gh-nn.  to  the.  conception.  He  goes  back  to 
capital  as  the  source  of  income,  and  makes  this  the  object  of 
his  definition  : Capital,  he  says,  is  “ every  durable  foundation  of 
a utility  iNutzund\  which  has  exchange  value.”  ^ In  opposi- 
fion  to  the”^IasF  definition  this  one  includes  under  the  concep- 
tion of  Capital  all  land,  and  besides  embraces  such  consump- 
tion goods  as  are  durable,  like  furniture,  houses,  etc.,  even  if 
they  are  personally  used  by  the  owners. 

A fifth  variation  is  given  by  Mcnger.  He  defines  capital  as 

^.<such  groups  of  economic  goods  of  higher  rank  (productive  goods) 

I as  are  now  available  to  us  for  future  periods.^  This  defini-^ 

tion  is,  in  one  way  narrower,  in  another,  wider  than  Hermann’ 
It  excludes  durable  consumption -goods  (“goods  of  the  first 
rank  ”),  but  it  is  wide  enough  to  take  in  the  productive  services 
of  lahourj  which  Hermann  Had  not  reckoned  as  capital. 

A sixth  variation  comes  from  Kleinwachter.  He  finds  it 
a chara.cteristic  mark  of  capital  that  it  lightens  the  toil  of 

acquisTtion  or  productive  hihour.  Now  this  characteristic 
appears  to  him  not  to  belong  to  aU  means  of  production,  hut 
only  to  one  category  of  these,  the  tools  of  production,  while 
the  matter  or  materials  of  production  are  absolutely  passive 
during  the  whole  production  process ; they  are  worked  up  or 
used  up  but  give  no  assistance  in  working.  “ Logically,” 


^ Staatswirthsehaftliche  Uhtersibchungen,  Munich,  1832,  p.  59,  and  similarly 
in  the  second  edition  of  1874,  p.  111.  On  p.  56  he  expressly  calls  capital 
“ Wealth  which  brings  in  income.”- 
^ GruTidsdtze,  Vienna,  1871,  p.  130. 

® See  Mataja,  Der  JMernehmergevrinn,  1884,  p.  180. 


32 


DEVJ^LOPMENT  OF  THE  CONCEPTION 


BOOK  I 


7 


therefore,  “ the  conception  of  capital  should  be  hniited  to  tools 
of  production.”  ^ 

seventh  interpretation  has  Jevons  for  its  . .author^  It 
runs  parallel  to  a certain  extent  with  the  foregoing.  That  is 
to  say,  Jevons  also  considers  it  proved  that  by  capital  is  to  be 
understood  “ wealth  employed  to  facilitate  production.”  ^ But 
he  finds  this  characteristic  in  quite  another  group  of  concrete 
goods  from  that  of  Kleinwachter.  “ The  siugle  and  all- 
important  function  of  capital.”  he  says,  “is  to  enable  thp. 

labourer  to  await  the  result  of  any  long  lasting  work — to  put 
an  interval  between  the  beginning  and  the  end  of  an  enter- 
prise.” Capital,  then,  “consists  merely  in  the  aggregate  of 
those  commodities  which  are  required  for  sustaining  labourers 
of  any  kind  or  class  engaged  in  work.  A stnc.k  of  fond  is  tbp 
main  element  of  capitab  but  supplies  of  clothes,  furniture, 
and  all  the  other  articles  in  common  daily  use  are  also 
necessary  parts  of  capital.”  The  true  and  only  capital  thus, 
according  to  Jevons,  is  the  sustenance  of  the  labourers.® 

Marx  arrived  at  an  eighth  reading  of  the  conception.  As 
every  one  knows  he  sees  in  mterest“a  pfdflrgot'By  the  capitalist 
at  the  expense  of  the  wage-earner.  This  element  of  exploitation 
seems  to  him  so  important  that  he  brings  it  pi  to  the  concep- 
tion of  capital  as  a constitutive  feature  of  it : he  conceive  of 
capital  as  only  those  productive  instruments  which,  in  the 
hand  of  the  capitahsts,  serve  as  “ instruments  for  the  explqita- 
tion  and  enslaving  of  the  labourer.”  The  same  things  in  the 


possession  of  the  labourer,  on  the  other  hand,  are  not  capital.'* 
.A  uiut]^  variation  we  owe  to  the  distinguished  critic  of  the 
theory  of  capital,  Karl  Knies.  It  originates  in  a well-meant 
attempt  to  settle  the  terribly  tangled  controversy  to  the  satis- 
faction of  everybody.  To  this  end  Knies  , endeavours  to 
construct  .a  conception  of  capital  which  will  be  so  wide  that 
the  most  imp'ortant  of  the  contending  interpretations  may  find 
room  in  it  beside  each  other.  The  uniting  element  in  the, 
conception  be  imap-ines  he  finds  in  the— devoti&n-of  gQods  to 


1 Gruridlagm  und  ZieU  des  sog.  wisscnschaftlichen  Sozialismus,  1885,  p.  184. 
^ Theory  of  Political  Economy,  second  edition,  London,  1879,  p.  242. 

® Ibid.  p.  242,  and  very  emphatically  p.  26*4  : “ The  capital  is  not  the  railway, 
hut  the  food  of  those  who  made  the  railway.” 

■*  Das  Kapital,  vol.  i.,  second  edition_,  p.  796  (first  edition,  p.  747).  See  also 
Knies,  Das  Geld,  first  editiori,  p.  53. 


CHAP,  in 


KNIES,  WALRAS,  MCLEOD 


33 


thp.  sRr\icp.  of  thf  fiitura  Accordingly  he  defines  the  capital] 
of  a community  as  “ its  svsils^^Q  gn^df;  (whether  for 

consmnption,  acquisition,  or  production)  which  may  he  apphed  to 
satisfying  wants  in  the  future.”  ^ This  definition  does,  as  a fact, 
afford  room  both  for  Turgot’s  “ saved  stocks  of  goods  ” and  for 
the  “ produced  means  of  production  ” of  Adam  Smith’s  school, 
as  also  for  all  goods  embraced  in  Hermann’s  definition  as 
affording  the  foundation  of  a durable — and  therefore  a con- 
spicuously future — utihty. 

Quite  by  itself  stands  the  tenth  interpretation,  that  of 
L.  Walras.  He  divides  all  economuTgoods  intg^j"  capital  ” and 
“ income  ” (revenu).  All  kinds  of  goods,  irrespective  of  their 
destination,  which  can  be  used  more  than  once — that  is,  all 
durable  goods — he  cnlls  capital : while  all  perishable  gnorls  a.re^ 
incorng.  Going  into  details  he  mentions  the  following  as 
capital: — Land  {capitaux  fonciers),  persons  {capitavxc  personnels), 
and  movable  durable  goods  {capitaux  proprement  dits  or  capitanx 
mohiliers),  while  he  considers  food,  the  raw  materials  of  in- 
dustrial production,  fuel  and  the  hke,  as  income.^ 

If  the  interpretations  just  mentioned  are  divided  in 
opinion  as  to  the  goods  which  should  be  designated  capital, 
they  are,  at  any  rate,  all  agreed  that  it  is  goods  that  are  to  bear 

that  name.  But,  finally,  an  eleven th  read i n g of  the  conception 
calls  this  in  question,  and,  instead  of  makmg  capital  a real 
concrete  quantity,  distils  out,  as  it  were,  some  kind  of  abstrac- 
tion  as  the  essence  nf  eapital  Thus  _M‘Leod^  who  sometimes 
recurs  to  a favourite  metaphor  of  earlier  writers  and  defines 
capital  as  a “ stock  of  accumulated  labour,”  sometimes  goes 
still  deeper  in  abstraction  and  defines  it  as  “nurchasing  power  ” 
or  “ circulating  power.”  These  phrases  are  not  meant  as  illus- 
trations, but  explanations  given  in  full  earnest ; he  gives  us  to 
imderstand  this  in  the  most  emphatic  way  by  saying,  in  one 
place,  that  the  apphcation  of  the  word  capital  to  goods  is  a 
simple  metaphor,  and.  on  another  occasion,  in  so  many  words. 


10, 


^ Das  Qeld,  first  edition,  p.  47.  In  the  second  edition  (1885)  the  same  concep- 
tion is  on  the  whole  retained,  but  often  formulated  in  a less  exact  manner. 
Accordingly,  where  I do  not  explicitly  mention  the  contrary,  I quote  from  the 
more  distinct  formulation  of  the  first  edition. 

^ RUmcrUs  (TDcmoinic  Politique  Pure,  Lausanne,  1874,  p.  218.  Launhardt 
{Mathematische  Begrii^idung  der  Volkswirthschaftslehre,  Leipsic,  1885,  § 2)  has 
closely  followed  Walras. 

D 


34 


DEVELOPMENT  OF  THE  CONCEPTION 


BOOK  1 


onpital  not  rp.prp.sp.ot-,  goods  in  any  way  whatever,.^ 

Quite  recently  too  we  have  a strikingly  similar  conception  in 
the  suggestive  work  of  a juristic  writer,  Kiijiuasr,  Hp  also  t.pfla 
us  emphatically  that  capital  is  of  an  immaterial  nature,  and 

does  not  consist  of  material  objects  at  all — of  goods  themselves, 
that  is  to  say — but  only  of  their  value.  “ Capital  is  . . . the 
value  of  the  productive  power  contained  in  material  goods  . . . 
or  a complex  of  productive  material  values.”  ^ 

Numerous  as  are  these  various  readings  of  the  conception, 
our  list  does- not  by  any  means  exhaust  the  divisions  and  sub^ 

djyi^sions  that  might  be  given.  In  addition  to  the  above  inter- 
pretations which  differ  in  form — which  are,  that  is,  different 
definitions — there  may  be  complete  imanimity  as  to  the  formula 
of  the  definition,  and  yet  a good  deal  of  disagreement  as  to  the 
essence  of  it.  This  might  happen  where  a word  employed  in 
all  the  definitions  as  characteristic  and  distinctive  was  not 
used  in  all  of  them  in  the  same  sense.  Not  to  speak  of  less 
important  instances,  there  are  two  charaeteristie  terms  which, 
as  capable  of  different  readings,  involve  materially  different 
interpretations  "of  the  conception  of  capital  One  of  these  is 
the  word  “ good.”  Of  the  many  economists  who  were  agreed 
in  defining  capital  as  a stock  or  group  of  goods,  some,  taking 
the  word  in  its  narrower  sense,  thoi^ht  only  of  a supply 
of  material  goods ; some,  extending  it  to  immaterial  objects. 
thought  of  things  like  the  state,  peace,  law,  national  honour, 
virtue ; ® some  again,  under  the  same  term,  included  useful 
personal  properties  and  powers ; ^ while  others  took  man 
himself  into  the  conception.®  A similar  ambiguity  Jias 
attended  the  use  of  the  characteristic  term  “ means  of  produc- 
tionj’  or  simply  “ production.”  While  some  economists,  and 

1 ‘ ‘It  floss  not  represent  commodities  in  any  way  whatever,  but  only  the  power 
its  owner  has  of  purchasing  what  he  wants  ” {Elements  of  Political  Economy, 
1858,  pp.  66  and  69). 

2 “Ueber  den  rechtlichen  Begriifdes  Kapitals,”  in  the  Beitrdgczur  ErldiUcrung 
des  Deutschen  Rechtes,  1884,  p.  356  ; and  particularly  pp.  385-387. 

* See  also  Knies,  Das  Geld,  p.  17  (second  edition,  p.  38). 

■*  Thus  occasionally  Adam  Smith,  J.  B.  Say,  and  others. 

5 Thus  Canard:  “The  fundamental  wealth  of  one  who  pursues  au  art  or  a 
Handicraft  is  his  own  person”;  and  later,  M'Culloch  {Principles  of  Political 
Economy,  1825,  p.  319) ; “A  labourer  is  himself  a part  of  the  national  capital.” 
Elsewhere  he  explains  the  wage  of  labour  as  an  interest  on  capital  of  the  “machine 
called  man.” 


CHAP.  Ill 


ROSCHER 


35 


those  the  majority,  understood  by  production  simply  a pro- 
ducing of juaterials-  for  the  satisfaction  of  human  want,  others 
included  the  producing  of  what  they  called  “mward  goods.” 
the  creation  of  satisfactory  conditions  for  and  in  the  human 
person.  The  consequence  of  this  was  that  the  significant  term 
“ means  of  production  ” lost  every  possible  limitation,  and  that 
even  goods  for  immediate  enjoyment  were  received  into  the 
conception  of  capital  on  the  ground  of  being  instrumental  in 
producing  the  “ inward  goods  ” of  content,  health,  culture,  etc. 
The  greatest  sinner  in  this  respect  is  Eoscher.  He  first  defines 
capital  to  be  “ every  product  which  is  dedicated  to  further 
production,”  but  then  divides  this  general  conception  into 
“ Productive  capital  ” and  “ Use  capital,”  according  as  these 
products  affect  the  production  of  material  goods  or  “ the  pro- 
duction of  personal  goods  or  useful  relations.”  ^ Thus,  notwith- 
standing the  difference  in  definition,  his  conception  of  capital 
practically  comes  very  near  to  that  of  Turgot. 


^ Grundlagen  der  National bkojuymie,  § 42. 


CHAPTEE  IV 


THE  TEUE  CONCEPTION  OF  CAPITAL 

Political  economists  have  not,  as  a rule,  been  noted  for  the 
imanimity  of  their  definitions.  But  here  the  differennes  in 
the  interpretation  of  the  conception  are  so  excessive  as  to 
suggest  that  there  may  he  something  quite  peculiar  about 
the  object  of  dispute.  I think"  Knies  has  quite  correctly 
estimated  the  peculiar  position  of  the  case  when  he  says  that 
“ there  is  something  else  in  it  than  an  ordinary  scientific 
dispute  as  to  whether  a particular  definition  is  happy  or 
unfortunate,  or,  indeed,  true  or  false.”  ^ It  is  nnt  thp.  rlpfirii- 
tion  that  is  the  matter  of  dispute,  'hni'  itip  Hpfinprl ; 

or,  as  I should  prefer  to  say,  the  ‘terminology.  The  material 
difference  in  the  definitions  is  not  so  much  that  the  one 
thing  to  be  defined  appears  to  each  one  in  a different  light, 
as  that  each  one  is  defining  an  entirely  different  thing : and 
thus  definitions  that  are  really  incompatible  come  within  the 
same  ring-fence,  because  each  one  claims  the  expression  Capital 
for  the  object  he  is  defining. 

It  is  clear  that,  while  this  circumstance  may  explain  the 
striking  divergence  of  opinions,  it  makes  it,  imfortunately,  more 
difficult  to  decide  between  them.  For  in  questions  of  nomen- 
clature there  is.  strictly  speaking,  neither  right  nor  wrongr 
There  is,  therefore,  nothing  to  compel  conviction ; there  is  only 
an  appeal  to  a greater  or  less  appropriateness ; and  people 
may  to  a considerable  extent,  remain  of  different  opinions  as  to 
the  appropriateness.  All  the  same  it  is  clear  that  our  .cnji; 
troversy  must  he  settled.  It  is  impossible  that  economic 
science  can  for  all  time  allow  its  representatives  liberty  to  call 


1 Das  Geld,  p.  5. 


CHAP.  IV  REQUISITES  OE  A TRUE  CONCEPTION 


37 


ten  or  eleven  fundamentally  different  things  by  the  same 
name.  Political  Economy  requires  clear  thinking,  and  for  that 
the  prerequisites  are  clear  ideas  and  clear  speech.  We  must 
come  to  an  agreement,  and  it  will  he  come  to  exactly  as 
men  have  agreed  and  continue  to  agree  over  the  innumerable 
disputes  to  which  the  nomenclature  of  the  descriptive  natural 
sciences,  zoologj^,  botany,  mineralogy,  geography,  continually 
gives  rise.  The  majority  unite,  and  slowly  but  surely  leave 
the  dissentients  and  pass  to  the  order  of  the  day. 

But  on  which  of  the  numerous  readings  of  our  conception 

of  capital  can  we  hope  to  unite  unprejudiced  persons  ? To  my 
mind,  if  we  have  once  reahsed  the  nature  of  the  controversy 
as  pre-eminently  one  of  terminology,  we  shall  not  find  it  so 
difficult  to  decide  as  the  amount  of  confusion  up  till  now 
might  lead  one  to  suppose.  Happily  there  cannot  he  much 
doubt  as  to  certain  lending  principles  that  have  to  be  observed 
in  questions  of  terminology  • if  these  are  impartially  acted 
upon,  the  great  majority  of  the  competing  definitions  wiU  he 
definitely  thrown  out,  and  there  will  not  remain  more  tha^i 
two  or  three  between  which  there  need  be  any  real  hesitation. 
And,  even  in  this  short  leet,  the  arguments  of  appropriateness 
which  must  decide  are  so  unequally  distributed  that,  though 
we  may  not  be  able  actually  to  force  a universal  acceptance  nf 
nnp..  definite  p.nnn.pptkm — as  it  is.  after  all,  only  appropriate- 
ness that  must  guide  us, — yet  we  may  confidently  look  for  the 
voluntary  adhesion  of  a vast  majority. 

The  leading  principles  we  have  to  observe  seem  to  me  to 
be  as  follows.  First,  and  chieflY,  it  is  quite  clear  that  our 
^ding  of  the,  enneeptinn  must  be  logically  unassailable : that 
is  to  say,  it  must  not  contra, diet  itself,  and  it  must  apply  to 
the  object  which  it  proposes  to  define.  Then,  we  must  not  he 
spendthrift  in  our  terminology : that  is  to  say,  we  must  not 
attach  the  name  capital  to,  and  make  it  synonymous  with,  a 
conception  that  already  has  a name,  while  other  suggestive 
conceptions,  to  which  naturally  the  word  would  equally  well 
apply,  have  to  do  without  any  name.  Thirdly,  the  conception 
we  adopt  must  be  scieptificallv  important  and  scientifically^ 
uaefuL  Lastly,  and  not  least,  unless  an  alteration  be  urgently 
demanded  on  some  grounds  of  logic  or  appropriateness,  the 
name-of  capital  must  be  left  to  that  conception  for  whicli-it. 


38 


THE  TRUE  CONCEPTION  OF  CAPITAL 


BOOK  I 


has  been  longest  and  most  generally  used.  Or,  to  put  it  in  a 
more  roundabout  way : as  things  are  at  present,  everybody 
treats  of  the  most  weighty  theoretical  and  social  problems 
imder  the  general  name  of  “ problems  of  capital  ” ; that  being 
so,  the  word  capital,  wherever  possible,  should  be  ^o  used  as  to 
spare  us  the  aggravated  difficulties  that  will  attend  the  great 
controverted  questions  of  the  day  if  we  rebaptize  their  terms. 

In  view  of  these  rules  I would  suggest  the  following  as 
the  most  adequate  solution  of  the  controversy. 

Capital  in  general  we  shall  call  a group  of  Products  which 

serve  as  means  to  the  Acquisition  of  Goods.  Under  this 
general  conception  we  shall  put  that  of  Social  Capital  as 
narrower  conception.  Social  Capital  we  shall  caU  a group  of 
products,  which  serve  as  means  to  the  socio- economical 
Acquisition  of  Goods ; or,  as  this  acquisition  is  only  possible 
through  production,  we  shall  call  it  a group  of  products 
destined  to  serve  towards  further  -production ; or,  briefly,  a 
group  of  Intermediate  Products.  Synonymous  with  the  wider 
of  the  two  conceptions,  the  term  Acquisitive  Capital  may  be 
very  suitably  used,  or,  less  suitably  but  more  in  accordance 
with  usage,  the  term  Private  Capital.  Social  Capital  again, 
the  narrower  of  the  two  conceptions,  may  be  well  and  concisely 
called  Productive  Capital.  The  following  are  my  reasons  for 
this  classiflcation. 

Capital  in  its  wider  sense,  and  capital  in  its  nai  rower 

sense^  both  marV  _nnt  categories  which,  economically,  are  ofl 
the  highest  importance.  “ Products  which  serve  to  acquisitive 
ends”  possess  a pre-eminent  importance  for  the  theory  of 
income  as  being  the  source  of  interest ; while  the  “ inter- 
mediate products  ” possess  at  least  as  great  an  importance  for 
the  theory  of  production.  The  distinction  between  production 
from  hand  to  mouth  and  production  which  employs  roundaboijt, 
and  fruitful  methods,  is  so  fundamental  that  it  is  eminently 
desirable  that  a special  conception  should  be  coined  for  the 
•latter.  This  is  done— if  not,  as  we  shall  see,  in  the  only 
possible  way,  yet  in  a way  that  is  not  inappropriate — in 
grouping  together,  under  the  conception  of  capital,  the  “ inter- 
mediate products”  which  come  into  existence  in  the  course  of 
this  roundabout  production. 

Again,  the  solution  suggested  is  the  most  conservative  _one^ 


CHAP.  IV  ACQUISITIVE  AND  PRODUCTIVE  CAPITAL 


39 


Without  laying  any  particular  weight  on  the  fact  that  the 
historical  origin  of  the  word  Capital  ^ indicates  a relation  to 
an  acquisition  or  a gain,  and  that  our  reading  remains  true  to 
this,  it  preserves  the  double  relation — -the  relation  to  acquisi- 
tion of  interest  on  the  one  side,  and  to  production  on  the 
other — which  was  imported  into  the  conception  of  capital  by 
Adam  Smith,  and  since  his  time  has  been  adopted  in  scientific 
usage.  It  is  no  inconsiderable  advantage,  then,  that  we  do 
not  require  to  create  a majority  in  its  favour  by  a revolution 
in  terminology ; the  majority  is  already  with  us,  and  the 
conception  may  easily  be  carried  unanimously  if  we  add  some 
new  unbiassed  members.  Here,  too,  it  is  worthy  of  particular 
attention  that  those  writers  who  have  occupied  themselves 
professedly  and  most  profoundly  with  the  investigation  of  the 
conception  of  capital  and  its  problems,  have  ended,  almost 
without  exception,  by  adopting  exactly  the  same  conception,  or 
at  least  one  which  comes  very  close  to  it.^ 

Connected  with  this  is  the  further  advantage,  that  we  avoid 
a puzzhng  change  of  name  for  the  two  classes  of  problems  which 

1 See  above,  p.  24. 

- Cossa  {La,  Nozione  del  CapUale),  Saggi  di  Ec.  Pol.,  p.  157,  has  the  defini- 
tion : “ Capitale  e un  prodotto  impiegato  nella  produzione.”  Ricca- Salerno 
{Sulla  Teoria  del  Capitale,  1877,  p.  51)  says:  “II  capitale  e ricchezza  prodotta 
applicata  alia  produzione.  ” Rodbertus.  whose  opinion  I am  inclined  to  put  parti- 
cularly high,  because,  although  not  altogether  happy  in  his  solution  of  the 
problems  of  capital,  he  had  an  insight  into  its  essence  such  as  scarcely  any  one 
before  him  had,  explains  {Das  Kapital,  p.  234,  also  Zur  Beleuchtung  der  soz. 
Frage,  p.  98)  that  “Capital  (materials  and  tools)  is  product  which  serves  for 
still  farther  production.”  A.  Wagner,  also,  who  has  done  good  service  in  the 
theory  of  capital  {Grundlegung,  second  edition,  p.  38),  calls  capital  a “Stock  of 
economical  goods,  which  serve  as  instruments  to  the  making  or  acquiring  of  new 
economical  goods.”  In  the  most  recent  Italian  monograph  on  capital,  Supino 
{II  Capitale  TvelV  Organismo  Economico  e nelV  Economia  Politica,  1886,  pp. 
9 and  17)  defines  capital  again  as  “II  prodotto  del  lavoro  passato  che  serve  a 
produzione  successiva,”  or  as  “ricchezza  impiegata  produttivamente  alio  scopo 
di  ricavarne  un  piofitto.”  Of  other  prominent  modern  writers  may  be 
mentioned  Pierson  {Leerhoek  der  Staathuishoudkunde,  Haarlem,  1884,  p.  157) ; 
Schbnberg  {Handbuch,  second  edition,  p.  209),  “ Capital  is  a material  meaus  of 
production  obtained  by  human  labour,  which,  employed  as  such  As  destined  to 
give  a return  to  its  owner  ” ; E.  Sax  {Grundlegung  der  theoretischen  Staatsvdrth- 
schaft,  pp.  115,  315,  323,  etc.)  Of  recent  French  writers  on  the  subject  Oida 
{Prindpes  d’Economie  Politique,  Paris,  1884'!  recognises  the  two  varieties  in  the 
conception  of  capital  with  a clearness  rare  even  in  French  literature,  and  distin- 
guishes them  as  “capitaux  simplement  lucratifs”  and  “capitaux  productifs.” 


40 


THE  TRUE  CONCEPTION  OF  CAPITAL 


BOOK  I 


.of  now  under  the  name  of  problems  of  capital. 
The  popular  name  is  retained  both  for  the  “ factor  of  produc- 
tion ” and  for  the  “ source  of  interest.”  And  finally,  it  seems 
to  me  no  small  advantage  that,  notwithstanding  the  material 
difference  there  is  between  capital  the  factor  of  production, 
and  capital  the  source  of  interest,  it  is  not  necessary  in  our 
reading  of  Jt—ta  make . two  conceptions  of  capital  that,  .are 
entirely  foreign  to  one  another,  and  have  nothing  more  in 
common  than  cat  has  with  category.  Our  two  conceptions 
have  just  enough  in  common  to  allow  of  their  being  formally 
coupled  under  one  common  definition,  and  then  distinguished 
as  narrower  and  wider  conceptions.  True,  their  connection  is 
not  an  intimate  one,  and  in  the  light  of  what  has  been  said 
it  cannot  be  so  ; it  rests  sirnply  nn  the  accidental  circnTnstn.Tic.p. 
thaty  for  society  as  a whole,  which  cannot  acquire  except 
through  producing,  the  goods  which  constitute  the  produced 
me.ans  of  acquisition  (capital  in  the  wider  sense)  coincide  with 
the  goods^  which  constitute  the  q)roduced  means  oi  production 
(capital  in  the  narrower  sense,  or  Social  Capital).  It  will  be 
noted  that  I use  the  phrase  Social  Capital,  and  not  the  common 
expression  National  Capital  I do  so  for  this  reason,  that,  for 
a Limited  community,  the  means  of  acquisition  embrace-nob 
only  productive  goods  but  consumption  _gQods-leat^  to  foreign 
countries.  Those  who  hold  by  the  conception  of  National 
Capital,  then,  must  either  take  in  the  above-named  consump- 
tion goods  along  with  productive  goods,  thereby  arriving  at  a 


les  seconds  sont_ceux_q^ui  produiseiU  une  richesse  nouvelle  dans  le  paysy  (p. 
148).  His  only  failure  is  that  he  would  recognise  productive  capitals  alone  as 
“ true  ” capitals. 

Jii_English_literature  our  conception  of  capital  (without,  of  course,  any  clear 
distinction  being  kept  between  its  two  varieties!  is  almojt  exclusively  the  prevaiL- 
ing  one  ; this  is  so  well  known  that  I may  spare  quotations.  Generally  speaking, 
it  is  very  significant  of  the  state  of  “public  opinion”  in  the  matter  that  not 
long  ago  Kleinwachter  (Schonberg’s  Handhiteh,  second  edition,  p.  210)  could 
explain  ‘ ‘ Common  usage  in  political  economy  to-day  considers  it  an  essential 
characteristic  of  capital  that  it  is  a material  means  of  production.”  The  only 
difference  of  opinion  is  as  to  whether  landjshpjuld.  be  reckQn.e(La.s_capita_l  or  not. 
Finally,  I think~T"may  venture  to  express  the  opinion  that  even  the  fore- 
most representative  of  a rival  definition,  Knies,  is  in  opposition  to  us  more  in 
form  than  in  matter.  It  is  he  at  any  rate  who  has,  in  a masterly  manner, 
developed  the  idea — the  really  important  one  in  our  statement  of  the  concep- 
tion— that,  in  defining  capital,  we  must  define  that  which  is  the  object  of  those 
problems  that  “have  appeared  on  the  scene  under  the  name  of  capital”  {Das 
Geld,  p.  19). 


CHAP.  IV 


OR  PRIVATE  AND  SOCIAL  CAPITAL 


41 


very  uninteresting  conception  indeed ; or  if  they  mean  to 
confine  it  to  productive  goods  only,  they  must  build  their 
national  conception  on  a cpxite  independent  basis,  and  break 
off  all  logical  connection  with  the  other  conception, — wliich 
would  at  any  rate  be  a doubtful  policy.  Our  “ Social  Capital  ” 
avoids  both  these  difficulties. 


CHAPTEE  V 

THE  COMPETING  CONCEPTIONS  OF  CAPITAL  ' 

And  now  we  may  review  the  other  conceptions  of  capital 
already  mentioned,  and  see  if  any  of  them  can  better  satisfy 
scientific  requirements. 

The  conception  which  seems  to  me  to  come  nearest  to 

ours  is  that  suggestive  one  which  may  be  most 
called  the  “ National  Subsistence  Fund,”  and  which  very 
much  coincides  with  Turgot’s  “ Saved  Stocks  of  Goods.”  This 
conception  embraces  all  material  goods  with  the  exception 
of  land.  Later  on  we  shall  have  to  make  ourselves  very 
accurately  acquainted  with  it,  and  to  avoid  repetition  I refrain 
from  going  farther  into  it  here.  I shall  only  say  this  much. 
The  conception  of  the  national  subsistence  fund  is.  like  our 
own,  a conception  of  great  scientific  suggestiveness,  and  is  so 
as  regards  those  very  problems  which  connect  themselves  with 
the  word  capital  In  particular,  as  being  so  much  ia  touch 
with  the  phenomenon  of  capitalist  production  (production 
carried  on  in  lengthy  processes  and  roundabout  methods),  it 
even  more  happy  than  our  conception  of  the  Intermediate 
Products.  The  latter,  indeed,  embraces  all  those  goods  which 
come  into  existence  during  the  production  process,  the  goods 
which  carry  it  on  and  help  to  complete  it ; but  it  does 
not  embrace  the  initial  fund  of  consumption  goods  needed 
to  commence  the  process^  It  therefore  leaves  out  the  first 
link  in  the  chain,  which  is  a very  important  one,  while 
the  conception  of  the  Subsistence  Fund,  as  I understand  it, 
embraces  the  entire  group  of  goods  by  means  of  which  the 
capitahst  process  is  begun  and  carried  through. 

Notwithstanding  the  importance  of  this  conception  in  the 


CHAP.  V 


NATIONAL  SUBSISTENCE  FUND 


43 


theory  of  capital.  J put  it  seconfl  to  the  other  for  the  following 
reasons.  First,  on  account  of  the  difficulty  of  sharply  diyiding 
between  those  funds  of  subsistence  which  serve  for  acquisition 

and  production,  and  those  which  stand  outside  of  any  relation 

to  acquisition,  and  consequently  have  nothing  at  all  to  do 
with  the  scientific  problem  of  capital.^  Second,  that  in  any  case 
the  conception  of  “ intermediate  products  ” is  so  conspicuously 

important,  that  it  is  scarcely  less  worthy  of  being  indicated 
and  emphasised  by  the  name  of  capital,  than  is  the  conception 
of  the  “national  subsistence  fund.”  Third,  that,  as  compared 
with  the  latter,  the  “ intermediate  products  ” appear  to  me  to 
have  in  their  favour  the  distinct  and  also  the  decisive  ad^un- 
tage  of  being  already  familiar  expressions.  Capital,  the  factoi' 
of  production,  cairnot  again  be  left  without  a name,  and  for 
that  reason  the  conception  of  “ national  subsistence  fund  ” 
must  come  second. 

Next  in  importance  comes  Eoscher’s  conception.  It  is  due 
as  much  to  the  high  scientific  position  of  this  writer  as  to  the 
widely  spread  acceptance  of  his  doctrine  that  we  should  go  more 
fully  into  the  definition  he  gives  of  capital.  Unfortunately,  I am 
bound  to  say  that  it  seems  to  me  anything  but  happy.  In  the 
form  of  it  Eoscher  appears  to  come  very  near  to  the  same  concep- 
tion as  lies  at  the  basis  of  our  definition,  m claiming  the  designa- 
tion capital  for  “ every  product  saved  for  further  production.”^ 
But  in  the  very  next  lines,  when  enumerating  the  elements  of 
a community’s  capital,  he  veers  round  to  Tm'got’s  conception, 
and  includes  dweUing-houses,  “ utensils  of  personal  service,” 

^ I do  not  care  to  waste  more  words  than  necessary  here  on  things  which  will 
become  clear  of  themselves  as  we  go  on,  but  I may  make  one  remark.  For  reasons 
that  Rodbertus  {Das  Kapital,  p.  301)  has  seen  through  tolerably  correctly,  and 
which  will  be  fully  explained  later,  it  is  bv  no  means  my  meaning  to  emphasise 
only  the  subsistence  advanced  to  productive  labourers,  and  reckon  it  capital. 

Either  the  conception  of  capital  is  limited  to  goods  which  serve  im/mediatelv  in 
production,  and  therefore  to  productive  goods  proper, — in  which  case  means  of 
subsistence  in  general,  and  also  the  means  of  subsistence  of  labourers,  have  no 
share.  Or,  besides  “intermediate  products,”  such  finished  consumption  goods 
are  taken  into  the  conception  as  serve  indirectly  by  their  existence  to  produc- 
tion.— in  which  case,  as  will  be  shown  in  the  proper  place,  certain  advances  of 
subsistence  given  to  landowners  and  capitalists  must  be  included.  But  then  we 
are  at  once  met  with  the  difficulty  suggested  in  the  text  of  fixing  definitely,  when 

the  advances  of  subsistence,  given  to  people  who  do  not  themselves  produce,  are 
of  inJireet.assistance  to  production,  and  when  they  occupy  no  relatipn^to  it, 

* Grvndlagen  der  Nationalokmiomie,  § 42. 


44 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


and,  in  short,  goods  for  immediate  consiunDtion.  This  vacilla- 
tion is  due  to  the  fact  that  Roscher  gives  an  unusually  wide 
interpretation  to  the  conception  of  “ product  ” and  “ means  of 
production.”  He  looks  upon  every  satisfaction  of  a real  want 
as  the  production  of  a “ persongtl  good,”  ^ and  this  causes  him 
to  recognise  everything  that  servers  to  the  satisfaction  of 

human  want  (that  is,  simply,  all  goods)  as  means  of  production. 
Any  unbiassed  person  can  see  how  unfortunate  this  is.  With- 
out due  cause  it  obliterates  the  very  important  opposition  that 
exists  between  the  production  of  goods  which  satis^.  wank 
their  consumption.  It  christens,  for  example,  the  idler  as  a 
zealous  producer,  always  thinking  how  he  may  produce  the 
personal  goods  of  satiety,  of  ease,  of  contentment,  and  so  on. 
It  leads,  moreover,  to  a lamentable  waste  of  terminology. 
When  the  conception  “ means  of  production  ” is  made  synony- 
mous with  the  conception  “ good,”  there  is  no  name  left  for 
the  true  instrument  of  production.  But  the  latter,  as  a highly 
important  economic  category,  must  be  kept  prominent  and 
distinct  from  goods  for  immediate  consiunption,  and  so  we  fall 
from  one  confusion  and  ambiguity  of  terminology  into  another 
This  shows  itself  most  significantly  in  Eoscher’s  own  conception. 
He  feels  the  very  sensible  need  of  distinguishing,  inside  his 
conception  of  capital,  those  goods  which  serve  to  the  produc- 
tion of  “material  goods”  from  those  other  goods  which  serve 
simply  to  the  production  of  “ personal  good^”  and  he  does  this 
by  designating  the  former  as  “ productive  capitals”  and  the 
latter  as  “ use-capitals.”  This  expression  is  doubly  unfortunate. 
First,  in  putting  “ use-capitals  ” in  opposition  to  “ productive 
capitals,”  the  capacity  of  being  mei^nH  nf  prndnp.tion  is  im- 
plicitly refused  to  “ use-capitala.”  ; while  they  found  admittance 
to  the  conception  of  capital  only  on  the  ground  of  this  very 
capacity,  viz.  as  “ products  saved  for  further  production.” 
And  second,  the  same  word  “ productive”  is  made  to  serve  in 
the  one  breath  as  the  predicate  which  binds  together  all 
capitals,  and  as  the  predicate  which  divides  capital  into  two. 
Could  any  terminology  be  more  unfortunate  ? ^ 

But  Eoscher’s  definition  of  capital  is  not  only  inappro- 
priate ; iLis.  in  mv  opinion.  logicaEvL  unsound,  inasmucli-aa-it— 


^ Grundlagen  der  Naiionalokonomie.,  § 211. 

- See  also  the  acute  criticism  of  Knies,  Das  Geld,  p.  46. 


CHAP.  V 


ROSCHER'S  CONCEPTION 


45 


does  not  cover  those  thin^js  which  Boscher  means  it  to  define. 

After  he  has  christened  all  goods  productive  instruments,  it 
might  be  thought  that  he  would  consider  the  totality  of  goods  as 
capital,  with  the  exception  of  land.  The  definition  of  “ products 
saved  for  further  production  ” — if  the  production  of  personal 
goods  be  included — seems  to  apply  to  them  all.  That,  how- 
ever, is  not  Eoscher’s  meaning.  From  his  enumeration  of  the 
elements  of  a community’s  capital,  as  weU  as  from  an  expression 
used  in  § 43,  where  he  puts  the  use-capital  in  opposition  to 
objects  of  use  which  are  not  capital,  it  follows  that,  of  con- 
sumption goods  he  wiU.  reckon  as  capital  only  those  which  are 
durable,  such  as  houses,  furniture,  etc.,  and  not  those  which 
are  perishable  (with  the  exception  of  the  means  of  subsistence 
of  productive  labourers).  He  justifies  this  by  saying : — “ On 
the  other  hand,  the  sharp  line  of  division  between  the  Use- 
Capital  and  those  objects  of  consumption  which  are  not  capital 
rests,  in  conformity  with  our  definition  of  capital,  on  the  fact 
that  the  latter  are  not  only  more  speedily  consumed,  but  are 
always  meant  to  be  consumed : whereas,  in  the  case  of  the 
former,,  the  consumption  is  only  the  inevitable  and  the  reverse 
side  of  the  use.”  These  words  cannot  very  well  mean  any- 
thing but  that  the  speedy  intentional  consumption  of  goods 
is  the  direct  opposite  of  “ saving,”  so  that  one  characteristic 
demanded  by  Eoscher’s  definition  is  not  present  in  perishable 
consumption  goods.  Suppose  this  granted,  is  the  same  defect 
not  inherent  in  the  perishable  raw  materials  and  auxiliary 
materials  of  production  as  in  the  means  of  subsistence  of  the 
productive  labourers,  which  Eoscher  has  expressly  enumer- 
ated among  the  elements  of  the  community’s  capital  ? Is 
not  “ the  coal  at  the  forge,”  the  “ gimpowder  in  the  chase 
and  in  blasting  operations,”  the  bread  in  the  worker’s  mouth, 

quickly  and  intentionally  consumed  ? It  is  either,  or ! 

■Either  speedy  and  intentional  consumption  is  the  opposite 

of  “ saving.”  and  takes  away  from  such  goods  the  property  of 
being  capital,  in  which  case  Eoscher  must  also  exclude  the 
perishable  raw  and  auxiliary  materials,  of  production  and  the 
maintenance  of  the  producers ; or  speedy  consumption  is  not 
a groimd  of  exclusion  from  the  conception  of  capital,  in  whioh 
case  the  perishable  means  of  “ production  of  personal  goods  ” 
cannot  be  refused  admittance  to  the  conception.  Eoscher’s 


46 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


definition  therefore  fits  either  a wider  or  a narrower  circle  of 
things,  but  never  exactly  that  circle  which  he  meant  to  define 
as  capital^ 

The,  conception  of  capital  most  closely  allied  to  this — -iti 

so  far  as  it  also  enumerates  consumption  goods  along  with 

acquisitive  instruments — is  that  laid  down  hv  Knies.  It  is 
based  on  an  idea  which,  from  the  point  of  theory,  is  as  inter- 
esting as  it  is  important.  All  the  same,  I think  that,  on  closer 
examination,  it  will  not  be  preferred  to  ours. 

Knies  defines  as  capital  “ that  complex  of  goods  avail  able 
to  a community  which  may  he  applied  to  the  sa.tisfa,ctiop  of 

want  i%  the  future.”  This  definition,  as  we  can  easily  see, 
agrees  almost  word  for  word  with  that  of  another  conspicuously 
important  and  fundamental  conception.  If  we  leave  out  the 
words  “ in  the  future,”  it  takes  in  all  the  goods  in  a.  cnmmu.uity 
available  for  the  satisfaction  of  want,  and  that  is  an  amount 
which  most  writers  are  in  the  habit  of  calling  the  “ wealth  ” 
{Vermogen)  of  the  community.  If,  like  Knies,^  we  emphasise 
the  fact  that  wealth  embraces  only  the  net  amount  of  goods 
after  deduction  of  debts,  we  may  perhaps  call  that  amount  the 
community’s  “ gross  property  ” ^ (Guterbesitz).  In  any  case 
we  have  in  this  to  deal  with  an  independent  amount  bearing 
an  independent  name,  with  which  “capital”  neither  coincide^ 

nor  should  coincide. 

Now  from  this  amount  Knies  would  distinguish  his  con- 
ception of  capital  by  adding  the  words  “ in  . the  future.”  Do 
these  words  really  convey  a distinction  ? In  my  opinion  they 
do  not ; at  least,  if  we  strictly  give  them  the  meaning  they 
naturally  have.  It  is  an  attribute  of  all  wealth  without 
exception  that  it  is  used  for  the  satisfaction  of  wants  in  the 
future.  All  accumulation  of  wealth  is  based  on  provision  for 

^ In  latest  editions  Rosoher,  evidently  under  the  influence  of  what  Knies 
has  said  on  the  subject,  formally  widens  his  definition  of  capital  to  some  extent 
by  an  addition.  It  now  runs:  “Every  product  which  is  destined  to  further 
economical  production  (even  to  systematic  later  use)  we  call  capital.”  This 
addition,  however,  does  not  materially  widen  the  conception,  as  Koscher,  inde- 
pendent of  this,  has  already  included  every  use — therefore  every  “systematic 
later  use  ” — in  the  production  of  (material  or  personal)  goods. 

" Das  Geld,  pp.  83  and  92. 

For  the  community  as  a whole,  moreover,  which,  naturally,  has  neither 
claims  nor  debts,  its  material  property,  according  to  Knies’s  definition.  completeLg 
poineidea  with  its  wealth. 


CHAP.  V 


KNJES’S  CONCEPTION 


47 


future  requirements.  Every  atom  of  wealth  in  my  possession 
at  this  moment  has  been  acquired  at  a previous  point  of  time 
with  the  view . of  being  spent  at  a future  point  of  time. 
That  point  of  time  may  not  be  far  away ; it  may,  perhaps,  be 
the  next  day,  or  the  next  hour ; but  certainly  it  is  stih  in  the 
future.  Tf,  therefore,  we  take  .the  word  “ futurps  ” in  ita  Rtricf, 
sense.  Knies’s  formula  has  obviously  defined  not  only  Capital 

but  Wealth.;  and  his  conception  of  capital  coincides  with  the 
ordinary  conception  of  wealth. 

If  Knies  had  actually  contemplated  this,  it  would  not  be 
difficult  to  pronounce  upon  his  conception  of  capital  We 
should  have  to  accuse  him  of  waste  of  terminology.  It  would 
evidently  be  a highly  inappropriate  duphcation  of  terms  to 
use  the  word  capital  as  a synonymous  expression  for  the 
familiar  conception  which  already  bears  the  name  of  wealth. 
while  other  weighty  conceptions — as,  for  instance,  certain 
groups  of  acquisitive  instruments — have  no  name.^  Ept 
Knies  had  no  thought  of  any  such  identification.  Indeed,  he 
repeatedly  and  emphatically  says  that  his  conception  embraces 
only  a part  of  the  total  possession  of  goods,  and  he  opposes  to 
it,  as  the  second  member  of  his  division,  those  goods  that  serve 
for  the  satisfaction  of  “current  present  want.”  This  classification 
obviously  assiimes  that  the  word  “ present  ” is  not  to  be  taken 
altogether  hteraUy.  For  if  by  the  “ present  ” were  to  be 
understood  strictly  that  point  of  time  which  divides  the  past 
from  the  future,  the  goods  which  entered  into  employment  in 
that  moment  of  time  would,  of  course,  represent  so  insignificant 
an  amount  that  it  would  not  be  worth  while  to  speak  of  them, 
to  say  nothing  of  basing  a scientific  classification  and  a new 
conception  on  their  short  lease  of  hfe.  If  the  second  member 
of  Knies’s  classification  is  to  be  anything  at  aU,  the  “ present  ” 
must  be  extended  from  a point  of  time  to  a period  of  time, 

and  this,  naturally,  can  only  be  done  at  the  expense  of  thq 

futute.  By  the  “ present  ” we  must  understand  a period  of 
time  which  goes  beyond  the  narrow  limits  of  the  fleeting 
moment,  and  takes  in  some  part,  large  or  small,  of  the  im- 
mediate or  near  future. 

Now,  while  it  would  be  pedantic  to  say  that  such  a 

^ Kuies  himself  has  pronounced  tliis  opinion  in  saying  (Das  Gtld,  p.  22)  that 
no  one  would  claim  that  “ capital  is  identical  with  economic  goods.” 


48 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


deviation  from  strict  literal  exactness  is  inadmissible,  it  seems 
to  me  unfortunate  if  a scientific  conception  can  only  holdJLts 
own  by  allowing  its  most  important,  indeed  its  only  character- 
istic fea,tiireT  to  be  nsed  in  aioose  sense;  all  the  more  so  that 
Knies,  in  order  to  guard  his  conception  of  capital  from  merging 
mto  that  of  wealth,  should  have  made  the  distinction  between 
present  and  future  into  a sharp  opposition.  Tt  is  not  too 
nrinp.h  tn  aay  hhat  his  conception  of  capital  lives  by  the  opposi- 
tion between  present  and  future,  and  this  opposition  must  lose 
its  strength  whenever,  and  so  far  as,  goods  devoted  to  the 
service  of  a near  future,  but  all  the  same  a future,  find  their 
place  not  on  the  side  of  capital  devoted  to  the  future,  but  on 
the  other ! 

But  to  look  further : if  we  add  a portion  of  the  future  to. 
the  present,  how  far  is  this  additiQiL,tQ-gO  ? Is  it  to  be  the 
next  hour,  or  the  next  day,  or  is  it  to  be  a longer  period — say 
the  current  month  or  the  economic  year  ? This  seems  to  me 
rather  an  important  point  to  determine,  but  KDip..s  himself  has 
not  saicLanytbing  aho,ut_iti  If,  in  his  place,  we  consider  the 
different  possibilities,  it  is  easy  to  see  that  the  addition  of  a 
short  period,  an  hour  or  a day,  does  not  secure  the  end  con- 
templated. The  amoimt  of  goods  that  a people  consumes  in  a 
day  is  of  its  income,  and  is  a much  smaller  fraction  of  its 
wealth.  Now,  very  few  people  would  think  it  appropriate  to 
separate  off  a thousandth  part  from  the  total  amount  of  goods 
which  form  the  total  wealth  of  a commimity  in  order  to  put 
the  remaining  together  under  one  independent  conception 

— particularly  when  that  thousandth  part  is  not  divided  off 
from  the  principal  sum  by  a clear  and  well-marked  opposition, 
but  only  by  a conventional  and  somewhat  metaphorical  reading 
of  the  word  “ present.”  To  put  it  shortly : .a_C£mcepti©m_iif 
iiapital  which  embraces  roughly  -pnm  of  the  conccBtiQO.— af 
wealth  comes  too  close  to  the  conception  of  wealth  to_haX£ 
any^scipntifip.  significance. 

But  if  we  add  a longer  period  of  time,  gay  a.  rnonth  we 
encounter  new  difficulties.  Owing  to  this  altered  reading  we 
shall  now  deduct  from  the  conception  of  capital  all  goods  that 
are  destined  to  be  consumed  in  the  ordinary  purposes  of  life 
during  the  current  month.  Good.  But  it  is  possible  that  I 
may  jmake  a profit  out  of  these  very  gnnds^previous  to  them. 


CHAP.  V 


KNIES 


49 


consumption  and  without  prejudice  to  it.  For  instance,  a 
sum  of  money  which  I intend  to  dispose  of  finally  on  the 
fifteenth  of  the  current  month,  I may  lodge  with  a bank 
as  an  interest-bearing  deposit  from  the  first  to  the  fifteenth, 
against  a deposit  receipt,  or  I may  put  it  into  open  account. 
What  then  ? Does  this  interest-bearing  money  belong  to 
capital  or  does  it  not  ? Wfiatever  the  answer,  we  do  not 
avoid  serious  difficulties.  If  we  answer  it  in  the  affirmative, 
we  lay  ourselves  open  to  the  charge  of  being  illogical ; for,  by 
hypothesis,  the  whole  of  the  current  month  is  a widened 
present.  But  if  we  answer  it  in  the  negative,  we  first  put 
ourselves  in  a position  of  flagrant  contradiction  with  firmly - 
established  usage ; then  we  commit  ourselves  to  the  strange 
doctrine  that  a thing  which  undoubtedly  bears  interest  is  not 
capital;  and,  finally  we  give  up  what  formed  the  strongest 
recommendation  of  Knies’s  conception — its  purpose  of  recon- 

ciliation. This  conception  of  capital  has  been  put  forward  by 
Knies  with  the  express  intention  of  uniting  under  it,  as  a 
higher  and  broader  unity,  all  former  and  competing  conceptions. 
In  it  Turgot’s  “ stocks  of  goods,”  and  Adam  Smith’s  “ complex 
of  acquisitive  instruments,”  and  Hermann’s  “goods  of  durable 
use  ” were  to  find  ample  room  beside  each  other.  But  this 
mission  of  reconciliation,  and  with  it  the  raison  d’etre  of 
Knies’s  theory,  disappears  the  moment  that  any  one  acquisitive 
instrument  is  denied  recognition  as  capital — especially  interest- 
bearing  money,  the  first  parent  of  the  conception.^ 

In  whatever  way,  then,  it  is  looked  at,  we  get  no  clear 
satisfaction  from  Knies’s  conception.  But,  to  be  just  to  Knies. 

I must  recognise  emphatically  that,  there  is  a deep  and  signifi- 

cant idea  at  the  root  of  it,  and  that  if  his  conception  fails  of 
its  end  it  is  only  because  of  external  defects,  or,  if  I might  say 
so,  defects  that  belong  to  the  technique  of  conception.  As  a 
fact  their  destination  to  the  service  of  the  future  is  a pec.Hliarly 
important  charactp.ristic  of  the  goods  we  call  capital,  indeed,  a 
characteristic  which  gives  us  the  key  to  the  most  important 
problems  connected  with  the  subject.  QuIy  it  is  not  exactly 
the  distinguishing  characteristic,  but  one  that  capital  shavRs 

^ It  needs  no  showing  that  the  group  of  short-dated  money  claims,  althoiitrh 
the  moat  obvious,  is  by  no  means  the  only  example  that  miafht  be  given  in  pvni^f_ 
of  the  objection  urged  in  the  text, 


50 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


with  several  other  classes  of  goods  which  we  have  good  reasons 
for  not  reckoning  as  capital ; and  for  that  reason — but  only 
for  that  reason — it  is  not  fitted  to  act  as  the  constitutive  and 
distinctive  feature  on  which  to  base  our  definition.^ 

The  conceptions  of  capital  hitherto  mentioned  are  dis- 
tinguished, as  a whole,  from  our  conception  in  that  they  incinrip. 
ronsumption  goods  as  well  as  acquisitive  instrnmp.nts  We 
come  now  to  certain  conceptions  that  agree  with  ours  in 
reserving  the  name  of  capital  for  a complex  of  acquisitive 
instruments,  but  differ  from  it,  and  from  each  other,  as  to 
what  this  complex  includes. 

The  widest  of  these  would  simply  include  under  capital  all 

acquisitive  instruments  — not  only  material  but  personal. 

Under  different  names  it  counts  labour  as  capital  Many 
conceive  of  the  work  of  the  labourer  as  capital  : others  of  his 
labour  yower ; ^ others,  again,  of  the  entire  person  o f the,  lahmirer^ 
In  itself  of  course  there  is  nothing  in  the  world  to  prevent  the 
totality  of  things  which  serve  in  acquisition  from  being 
grouped  together  under  one  uniting  conception,  and  called  by 
one  common  name.  This  has  already  been  done  substantially 
in  the  conception  and  under  the  title  of  “ acquisitive  instru- 
ments,*’ or  “productive  goods,”  or  “goods  of  higher  rank.” 
But  it  is  an  entirely  different  question  whether  one  is  pistified 

in  claiming  the  name  of  “ capital  ” for  such  a conception.  I 

should  say  with  all  possible  emphasis  that  one  is  not.  First 
of  all,  if  the  title  is  given  to  the  totality  of  all  acquisitive 
instruments,  it  can  only  be  at  the  cost  of  refusing  it  to  any 
narrower  group  of  acquisitive  instruments  which  likewise 
claims  it.  Now  the  former  conception  is  already  sufficiently 
known  by  the  above-mentioned  names,  while  the  narrower  and 

^ Among  others  Eicca-Salerno  {Sulla  Teoria  del  Capitals,  Milan,  1877,  p.  58) 
and  lately  Emil  Sax  {Grv/tidlegung  der  theoretischen  Staatsiuirthschaft,  p.  310) 
have  criticised  Enies  on  this  point.  Sax’s  criticism  of  the  weaknesses  of  Knies’s. 
conception  is  both  trenchant  and  substantially  correct,  but  he  does  not  recognise 

the  kernel  of  truth  that  is  in  it.  and  ends  by  a judgment  which,  on  the  whole,  is 
rather  rudely  expressed. 

^ For  instance,  Adam  Smith,  ii.  1 ; Umpfenbach,  Das  Kapntal  in  seiner  Kul- 
turhedeutung,  1879,  p.  19  ; Say,  Coure  Complet,  part  i.  chap.  x. 

® Thus  Say,  Cowrs  Complet,  part  i.  chap.  xiii. ; M'CullQch,  Principles,  first 
edition,  p.  319;  fifth  edition,  p.  294;  Walras,  £Umeyvts  d’ Eeonomie  Politique, 
p.  217. 


CHAP.  V 


INCLUSION  OF  LABOUR 


51 


rival  conception  is  very  important  and  has  no  other  name  but 
capital.  Even  were  the  question,  then,  in  other  respects  an 
entirely  open  one,  wp._  should,  on  the  ground  of  economy  of 
terms,  decide  against  the  use  of  the  word  capital  for  the  totality 
of  acquisitive  instruments.  But  it  is  not  an  open  question ; it 
is  already  prejudiced  by  universal  usage.  In  political  economy 
and  in  practical  life  generally  we  have  long  been  accustomed 
to  treat  of  certain  great  social  problems  as  problems  of  capital, 
and  in  doing  so  we  have  had  in  our  minds,  not  a conception 
which  embraced  labour,  but  a conception  that  opposed  capital 
to  kbmir.  Capital  and  Labour,  Capitalism  and  Socialism, 
Interest  on  capital  and  Wages  of  labour,  are  certainly  not 
harmless  synonyms ; they  express  the  strongest  conceivable 
social  and  economical  contrasts. 

ISTow  what  would  be  the  consequence  if  people  began  all  at 

once  to  call  labour  capital  ? In  the  most  favourable  circum- 
stances it  would  be  a.u  iuunvatiou  in  tpTTuiunlngy  with  little  to 
recommend  it.  If  all  the  world  were  to  adapt  itself  to  the 
innovation,  and  were  to  do  so  in  full  consciousness  that  it  was 
an  innovation  in  terminology  and  nothing  more,  it  might 
remain  perfectly  clear  that,  in  putting  under  one  common 
name  the  real  differences  that  sppa.ra.tp.  labnur.  from  what 
has  hitherto  been  called  capital,  tlie.se,  differences  are  not  in 
t]^P  loQct_  before,  everybody  would  notice  these 

differences,  and  work  without  bias  at  the  social  problems  to 
which  they  give  rise.  Economic  theory  would  not  then  suffer 
any  material  injury  bejmnd  the  inconvenience  of  having  no 
name  for  the  chief  object  of  such  inquiries ; for,  of  course, 
from  the  moment  that  labour  is  reckoned  capital  we  must 
cease  to  give  the  name  of  capital  to  its  social  opposite. 

This,  I say,  might  be  the  result  in  the  most  favourable 
circumstances;  unfortunately  such  a result  is  most  unlikely. 
It  is  much  more  probable  that  the  blending  of  the  names  . 
would  bring  confusion  into  the  matter.  We  need  not  deceive 
ourselves  on  this  point ; names  and  catchwords  always  exert  an 
immense  influence  over  us.  Most  of  us  are  very  fond  of  slurring 
over  inconvenient  contradictions  and  smoothing  down  thorny 
problems.  How  could  one  resist  the  tempting  opportunity, 
which  the  new  meaning  of  the  word  capital  would  offer  ? 
Between  Capital  and  Labour,  as  these  words  were  used 


52 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


formerly,  there  was  discord,  contrast,  conflict.  Now  one  single 
happy  word  unites  all  contrasts ; what  we  thought  opposites 
are,  really  homogeneous ; labour  is  capital ; wage  and  interest 
are  at  bottom  one  ! 

The  reader  will  perhaps  think  it  a mere  jest  to  put  such 
words  in  the  mouth  of  serious  thinkers.  Economic  literature, 
unfortunately,  witnesses  to  the  earnest  of  it,  as  we  see  in  the 
case  of  those  writers  who  conceived  the  unlucky  idea  of 
rebaptizing  labour  as  capital  There  is  first^^'CnHoch.  He 
represents  the  labourer  as  a piece  of  fixed  capital,  as  a kind 
of  machine.  When  he  has  thus  torn  down  the  partition 
wall  between  capital  and  labour  he  immediately  goes  on  to 
the  logical  conclusion,  and  abolishes  the  distinction  between 
Interest  and  Wage.  To  him  they  are  homogeneous ; but — 
and  it  is  as  significant  as  it  is  ridiculous — he  does  not  very 
well  know  whether  he  should  explain  interest  by  waga,  nr 
wage  by  interest.  He  gets  .out  of  the  difficulty  by  explaining 
each  by  the  other.  He  first  sets  forth,  at  great  length,  how 
interest  is  essentially  nothing  else  than  the  wage  for  “ previ- 
ously accumulated  labour,”  and  then  he  tries  to  make  the 
nature  of  wage  clearer  by  explaining  it  as  a profit  of  capital — 
“ the  common  and  ordinary  rate  of  profit  on  his  capital, 
exclusive  of  a sum  to  replace  its  wear  and  tear,  earned  by  the 
machine  called  man.”^  It  does  not  seem  to  have  occurred  to 
him  that  a see-saw  like  this  does  not  really  explain  either  of 
the  phenomena. 

M'Culloch’s  ill-digested  doctrines  have  nearly  fallen  into 
well-deserved  oblivion.  But  if  I am  not  mistaken,  we  are 
threatened  with  a resurrection  of  them  in  changed  form. 
Quite  lately  we  have  had  a number  of  views,mlQaely_rfiIatgd  to 
the  foregoing,  put  forward  with  that  suddenness  and  _ahundance 
which  is  at  aU  times  a sign  that  the  idea  is,  so  to  speak,  in 
the  air,  and  promises  to  be  fashionable.  We  are  told  almost 
simultaneously,  and  in  almost  the  same  words,  by  Weiss,  by 
Dargun,  and  by  Ofner,  that  every  labourer  represents  a.jr,apital 
p.qna]  tn  tbp.  p.nat  nf  bis  upbringing — say,  a thousand  thalers 
for  the  unskilled,  or  three  thousand  thalers  for  the  skilled 
labourer.  Or,  on  another  method  of  valuation,  we  are  taught 
that  the  labourer  is  equal  to  the  capitalised  net  return  of  ilia, 
^ See  my  Capital  and  Interest,  p.  99. 


CHAP.  V 


INCLUSION  OF  LABOUR 


53 


year’s  labour.  His  wage,  therefore,  is  peculiarly  a kind  of  hire 
of  capital,  and  must,  like  every-othe-r  hire,  eontain  at  least  the 
tjiree  follnwinf?  elp.merits : (1)  The  replacement  of  the  cost  of 
necessary  upkeep  of  the  human  machine,  calculated  at  the 
minimum  of  existence ; (2)  a quota  for  amortisation,  in  pre- 
miums of  assurance  against  old  age;  and  (3)  a met-Jutereat 
calculated  on  the  capital  value  of  the  human  machine  at  the 
ordinary  interest  rate.^ 

All  honour  to  the  motives  which  have  given  rise  to  this 
theory.  It  is  devised  in  the  interests  of  the  poor,  and  for 
the  reconciliation  of  all  classes.  Between  the  iron  law  of 
wages  which  takes  away  all  hope  from  the  worker  of  earning 
anything  but  bare  necessaries,  and  the  socialist  theory  which 
promises  the  labourers  everything,  and  the  propertied  classes 
nothing,  it  ste.ers  a middle  course;  it  leaves  the  owner  of 
material  capital  his  hard  p.nnt,p.st.pfl  interest,  hut  would  have  him 

share  it  with  the  owner  of  personal  capital.  Thus  the  joint 
capitalism  of  the  worker  becomes  on  this  theory  the  magic 
formula  that  is  to  be  followed  by  the  golden  fruits  of  recon- 
ciliation and  humanity.  The  pity  is  that  it  is  only  a formula ; a 
parade  of  words  with  no  soul  of  truth  in  it  Very  few  people 
would  deny  that,  in  certain  points,  there  is  a real  analogy  between 
a worker,  the  cost  of  whose  education  and  training  in  produc- 
tion has  been  advanced  to  him,  and  a piece  of  capital  But 
how  deep  does  this  analogy  go  ? On  occasions  when  we  wish  to 
make  use  of  it  in  making  comparisons  that  are  really  instructive, 
or  when  nothing  depends  on  scientific  exactitude,  the  analogy 
goes  deep  enough  to  permit  of  using  a figure  of  speech  and 
calling  the  labourer  a “capital,”  just  as  capital  also  is  often  spoken 
of  figuratively  as  “ previous  labour  ” or  “ stored-up  labour.”  But 
^be  aual ngv  does  not  hold  rig^  through,  and  in  particular  it 
fails  as  regards  wa^  and  intm^st..  That  capital  yields  a profit  or 
gain,  rests  on  a quite  peculiar  ground- — a ground  that  does  not 
obtain  in  the  case  of  labour,  or  does  so  very  exceptionally.  I 
hope  to  establish  this  with  perfect  clearness  when  we  come  to 

^ Ft.  Albert  Maria  Weiss,  Ord.-Priester,  Die  Gesetze  der  Berechnung  von 
KapUalzins  und  Arieitslohn,  Freiburg,  1883.  Quoted  by  Schaffle  in  Tiihinger 
Zeitschrift,  vol.  xli.  p.  225.  Dargun,  Arbeitskapital  und  NormaJerwerb, 
Tubinger  Zeitschrift,  vol.  xl.  p.  514,  and  specially  pp.  530-535.  Ofner,  Ueber 
das  Rechtsprineip  des  Arbeitslohnes  nacJi  herrschendcm  System,  Juristiseke  Blatter, 
1884,  Nos.  3 and  4.  Engel,  Der  Werth  des  Menschen,  1883. 


54 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


the  theory  of  interest,  but  this  much  1 may  say  meantime, — 
that  a man  must  have  curiously  shi'ftcrl  bis  point  of  view  if 

he  thinks  to  make  the  essential  nature  of  wap^e  more  intelbgible 

by  supporting  it  on  the  phenomenon  of  interest.  Of  the  two 
phenomena,  that  of  wage  is  by  far  the  more  simple  and  self- 
explanatory.  One  man  gives  the  valuable  good  called  labour, 
and  another  man  gives  him  a price  for  it.  Anything  simpler 
cannot  well  be  imagined.  But  the  fact  that  capital  yields 
an  interea  is  much  less  easy  to  iinderstand.  Witness  the 
many  theories  we  had  to  discuss  in  Capital  and  Interest, 
none  of  which  were  ever  able  to  state  satisfactorily  the 
essence  of  that  phenomenon.  To  think  of  explaining  the 
simple  faxjts  of  wage  by  reading  into  them  the  much  more 
involved  and  obscure  facts  of  interest,  is  really  to  explain  the 
church  by  the  steeple.  Moreover,  the  value  of  these  forced 
interpretations  receives  a vivid  illustration  in  the  fact  that, 
as  we  have  seen,  numerous  writers  are  at  the  same  time  striving 
to  get  at  a better  understanding  of  the  nature  of  interest  by 
expounding  it  as  a peculiar  kind  of  wage.  Where  then  the 
one  sees  the  riddle,  the  other  sees  the  solution.  What  an 
amount  of  vagueness  as  to  the  nature  of  the  problems  waiting 
solution  is  involuntarily  betrayed  in  all  this.^ 

To  sum  up.  The  inclusion  of  labour  in  the  conception  of 
capital  would  be,  in  the  most  favourable  circumstances,  inap- 
propriate ; in  the  more  unfavourable,  which  unfortunately  have 
been  the  real  circumstances,  it  has  been  pernicious,  calculated 
to  perpetuate  the  confusion  of  terminology,  to  open  door  after 
door  to  false  analogies,  and  to  obscure  and  prevent  clearness  of 
thought  in  those  very  questions  which  are  at  once  the  most 
difficult  and  the  most  important  in  the  social  science  of  to-day. 
We  shaU.  therefore  decide  very  emphatically  and.  T bope,^ 
unanimously,  to  exclude  personal  means  of  acquisition  from 
the  conception  of  CanitaL^ 

^ It  is  very  significant  that  none  of  the  authoi-s  who  explain  wage  by  interest 
makes  any  attempt  to  explain  interest  itself.  They  simply  accept  it  as  a given 
fact — with  the  exception  of  M'Culloch,  who,  with  amazing  nalveti,  repeats  the 
trick  again  in  the  opposite  way,  and  explains  interest  by  wage.  It  is  very 
gratifying  to  me  to  note  that  Schaffle  holds  himself  aloof  ‘Vom  the  theories  jnst, 
criticised,  although  his  social  and  political  tendencies  must  certainly  lie  in  their 
direction  {Tubinger  Zeitschrift,  vol.  xli.  p.  225). 

* See  also  Schmoller.  whose  conclusions  agree  with  mine  {Lehre  vom  Ein- 


CHAP.  V 


INCLUSION  OF  LAND 


55 


The  next  stage  of  the  controversy  brings  us  to  the  question 
whether  we  are  to  give  the  name  of  capital  only  to  the 
products  of  labour  that  serve  for  acquisition,  the  “previous 
stored  up  labour,”  or  are  to  include  land.  Both  views  claim  for 
the  name  of  capital  a really  important  and  fruitful  conception. 
As  contrasted  with  labour,  land  has  so  much  in  commog  with 
the  “ produced  ” acquisitive  instruments  of  material  nature 
that  a union  of  them  under  one  conception  has  good  justifica- 
tion. So,  too,  the  mcome  which  flows  from  the  two  kinds  of 
acquisitive  instruments  has,  in  many  essential  respects,  the 
same  nature,  and  this  likewise  favours  the  uniting  of  them  in 
one  conception.  On  the  other  hand,  in  many  essential  respects 
land  and  capital  take  different  wavs.  The  former  is  immovable; 
the  latter,  for  the  most  part,  movable.  The  former  is  a gift  of 
nature ; the  latter,  a result  of  labour.  The  former  cannot  be 
increased,  the  latter  can  be.  The  landowner  has  a social 
and  economical  position  essentially  different  from  that  of 
the  capitalist ; property  in  land  is  justified  on  essentially 
different  grounds  from  property  in  movables.  Land  is  the 
special  object  of  a kind  of  production  which  is  economically 
distinguished  by  many  important  pecuharities.  Income  from 
land,  while  subject  to  many  laws  in  common  with  income 
from  capital,  obeys  many  (iistinot  laws  of  its  own — land  rent. 
for  instance,  rising  with  economical  development,  while  interest. 

falls.  On  all  these  considerations,  the  number  of  which  might 
easily  be  increased,^  it  is  most  convenient  to  keep  land  quite 
distinct  from  the  other  kinds  of  productive  wealth. 

komnen  in  ihrem  Zusammmhang  mit  den  Grundprindpien  der  Steuerlehre, 
Tiihinger  Zeitschrift,  1863,  p.  24) ; Knies,  Das  Geld,  pp.  15-22  ; Kicca-Salemo,  as 
before,  p.  28;  and  Cossa,  La  Nozione  del  Capitale,  in  th“.  Sa^gi  di  Ec.  Pol.,  1878, 
p.  163.  What  Cossa  says  against  the  passion  for  immoderately  widening  the  con- 
ception of  capital  is  well  worth  noting.  He  is  remarking  that  one  very  often  feels 
the  want  of  an  expression  which  would  indicate  without  ambiguity  just  those 
products  which  serve  immediately  for  production,  and  he  continues: — “Se  il 
concerto  del  capitale  si  allarga  di  troppo,  comprendendovi  altri  prodotti,  o altri 
fattori  della  pr6duzione,  esso  o sfuma  del  tutto,  o non  ha  piii  la  sua  ragione  di 
essere.  Si  contruisce,  per  dir  la  cosa  in  altro  modo,  uno  strumento  od  imperfetto 
o superfluo,  il  quale  o non  serve  punto,  o non  serve  bene.  E tali  categorie 
debbotisi  senz’  altro  espellere,  e nongik  moltiplicare  nolle  investigazionieconomiche, 
se  non  vogliamo  che  la  scienza  si  isterilisca  in  polemiche  oziose  e puramente  nom- 
inali,”  p.  168. 

^ See  Knies,  Das  (^eld,  p.  33  ; Schonberg,  Handbueh,  second  edition,  vol.  i. 
p.  210  ; Roscher,  Grundlagen,  § 42,  note  1. 


56 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


Thus  the  two  competing  conceptions  are  fairly  weJl 
balanced  in  importance  and  suggestiveness,  and  if  these  pro- 
perties were  the  only  things  to  look  to  in  deciding  our  con- 
troversy the  decision  might  really  be  left  very  much  to  indi- 
vidual choice.  If,  however,  we  go  on  to  compare  the  two 
in  the  light  of  the  other  rules  we  have  laid  down  as  regulat- 
ing appropriate  terminology,  we  find  several  points  in  which 
the  “ complex  of  produced  acquisitive  instruments  ” has  a 
definite  advantage  over  its  competitor.  The  first  is  that  of 
economy  of  terms.  Tf  wp.  npply  fbe  word  capital  to  nil  ffip. 
material  means  of  acquisition^  then  the  narrower  of  the  com- 

peting conceptions,  and  the  branch  of  income  that  corresponds 
to  it,  remain,  notwithstanding  their  importance,  without  any 
name  at  alL  When  we  have  disposed  of  the  words  capital  and 
rent  of  capital  otherwise,  we  have  no  correspondingly  simple 
name,  either  for  the  group  of  produced  acquisitive  instruments^ 
or  for  the  income  that  comes  from  them.  On  the  other  hand, 
we  avoid  any  such  confusion  of  terminology  by  giving  the 
name  capital  to  the  produced  acquisitive  instruments.  The 
totality  of  all  material  acquisitive  instruments  may  then,  well 
and  simply,  be  called  “ acquisitive  wealth,”  and  aU  income 
flowing  from  it  may,  on  Eodbertus’s  precedent,  be  called  Eent 
with  its  convenient  subdivisions  of  land  rent  and  cjipital  rent 
'^hp.  liTTnitatinn  of  capital  to  “produced  means  of  acquisi- 
tion ” has  another  advantage  in  being  in  accord  with  populaj* 
usage.  Both  scientific  and  popular  language  tell  us  unmis- 
takably  that  they  do  not  put  land  under  capital,  but  oppose  the 
two.  The  genius  of  our  language  plainly  distinguishes  between 
landowner  and  capitalist.  No  one  will  say  that  a nation 
that  has  an  abundance  of  fruitful  soil  is  possessed  of  great 
capital  on  that  account.  The  name  of  interest  is  never  applied 
by  people  generally  to  the  income  from  land,  and  in  scientific 
literature  it  is  so  applied  only  by  an  insignificant  minority. 
And  in  the  discussion  of  the  great  social  problems,  property  in 
land  and  property  in  capital  are  generally  attacked  and 
defended  by  quite  distinct  people  and  by  quite  distinct 
methods.  If  we  sum  up  aU  that  has  been  said,  the  conclusion 
seems  to  be  that  while,  for  reasons  repeatedly  given,  there  can 
be  no  idea  of  an  absolutely  convincing  argument,  there  is-atilL 
a considerable  balance  in^favour_of  defining. _.capital_aa_Thfi< 


CHAP.  V 


NARROWER  CONCEPTIONS 


57 


“j)roduced  means  of  acquisition.”  and  ngainst  the  mclusion  of 

land._ 

Finally,  such  conceptions  as  would  limit  capital  still  more 
severely,  may,  I think,  be  easily  and  decidedly  refuted. 
TCIpiinwachter  would  distinguish  between  the  materials  and  the 
tools  of  production . and  reckon  only  the  latter  as  capital,  on 
the  ground  that  in  production  it  is  only  the  tools  that  actively 
co-operate  and  assist  us,  the  materials  of  production  being 
purely  passive.^  But  this  assumption  is  not  correct.  The 
function  of  materials  of  production  is  not  simply  to  serve  as 
a “dead  and  plastic  mass”;  by  means  of  the  natural  powers 
residing  in  them  these  materials  take  a share  in  the  work  of 

production  which  is,  indeed,  less  prominent,  but  is,  essentially, 
no  less  active.  Kleinwachter’s  view  is,  by  his  own  confession, 
incorrect  from  the  point  of  physical  science,^  and  as  we  have 
here  to  do  with  a question  of  productive  technique,  where 
political  economy  must  take  its  stand  on  natural  science,  it  is 
incorrect  from  the  point  of  economics. 

Marx,  a^ain,  would  confine  the  conception  of  capital 
those  productive  instruments  which  are  to  he  found  in  the 
hands  of  persons  other  than  the  labourers  themselves,  and  are 
used  to  exploit  the  labourers.  With  him,  therefore,  capital  is 
the  same  thing  as  “means  of  exploitation.”  This  distinction 
would  be  quite  an  important  and  suggestive  one  if  the  ( 
Exploitation  theory  itself  were  correct.  But  since,  as  has 
been  shown  in  my  former  work,®  it  is  not,  the  justification  of  \ 
the  distinction  based  on  that  theory  falls  with  it.  \ 

J evons’s  notion  of  capital  is  that  of  “ the  aggregate  of  those’^ 
commodities  which  are  required  for  sustaining  labourers  of  any 
kind  or  class  engaged  in  work  ” ; “the  wages  of  labour  either 
iu  its  transitory  form  of  money,  or  its  real  form  of  food  and 
other  necessaries  of  life.”^  If  this  were  correct,  every  land 
would  be  rich  in  capital  in  proportion  as  itn  wagps  wprp.  high 
and  its  means  of  subsistence  cheap..  An  African  tribe  that 
has  neither  industry,  nor  machinery,  nor  factories,  nor  railways, 
but  lives  under  a tropical  sun,  where  the  necessaries  of  life  are 


^ Die  Gru-ndlagen  und  Ziele  des  sog.  wissenscha/tliche^i  Sozialism/us,  Innsbruck, 
1885,  p.  185. 

® “In  the  strict  physical  sense,  of  course,  this  is  not  correct”  (p.  192). 

® Capital  and  Interest,  book  vi.  p.  313. 

‘ Theory  of  Political  Economy,  second  edition,  pp.  242,  263. 


58 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


poured  forlh  without  stint,  would  be  the  richest  hi  capital ! 
Obviously,  of  course,  the  idea  that  Jevons  had  in  his  mind 
was  a perfectly  correct  one,  but  the  expression  he  gave  it  was 
unfortunate.  He  confused  a condition  of  the  formation  of 
capital  with  capital  itself.  The  way  of  capitalist  production  is 
lon^  and  loundabout.  and  man  cannot  enter  upon  it  unless  he 
is  provided  with  the  means  of  subsistence  for  the  time  that 
must  intervene  before  he  reaps  the  return.  But  it  is  not  the 
means  of  subsistence,  and,  in  particular,  it  is  not  the  means  of 
subsistence  alone,  that  constitutes  capital.  Capital  only  comes 
into  existence  when  man  actually  enters  upon  the  profitable 
roundabout  journey  that  the  means  of  subsistence  have  made 
possible ; when  he  builds  machines,  tools,  railways,  factories, 
raises  raw  materials,  and  so  on.  However  abundant  the 
means  of  subsistence  were,  if  the  workers  were  to  consume 
them  in  living  from  hand  to  mouth,  the  community  would 
evidently  never  accumulate  capital  at  all. 

Finally,  there  remain  those  conceptions  which  see  in 
capital  not  a complex  of  goods,  hut  an  abstract  qua,ntity 
hovering  over  goods,  as  it  were,;  as,  for  instance,  Kuhnast’s 
“ sum  of  value,”  or  M'Leod’s  “ circulating  power.”  T have, 
generally  speaking,  a very  poor  opinion  of  such  idealisations 
of  economic  conceptions.  They  are  usually  cheap  expedients 
for  getting  round  difficulties.  If  in  any  difficult  subject  there 
occurs  some  troublesome,  angular  kind  of  conception  that 
corresponds  with  real  life  and  will  not  fit  in  to  the  particular 
line  of  explanation,  there  are  always  certain  theorists  ready  to 
disembody  it,  whereby,  of  course,  it  loses  its  unmannerly 
angles  and  edges,  but,  at  the  same  time,  its  strength  and 
truth.  It  becomes  a phrase  and  leads  to  ^ihrases.  - We  havg. 
an  instance  of  this  here.  If  we  were  to  take  the  sponsors 
of  those  definitions  at  their  word,  and  ask  them  whether  they 
would  seriously  say  that  an  immaterial  sum  of  value  or 
circulating  power  can  grind  corn,  or  spin  yarn,  or  plough  up 
land,  or  carry  a load ; or  whether  it  is  not  the  case  tha.t  these 
good  things  are  done  by:  the  common  material  goods  called 
mills,  looms,  ploughs,  locomotives,  they  would  be  very  much 
perplexed.  For,  asking  at  their  own  consciousness,  they  could 
scarcely  deny  that,  under  the  name  capital,  they  have  always 
and  peculiarly  thought  of  that  something  which  helps  man  to 


CHAP.  V 


ABSTRACT  CONCEPTIONS 


59 


work  in  his  production;  and  the  rude  materiality  of  this  some- 
thing agrees  but  ill  with  the  high-sounding  abstract  dcfinitinu 
of  “ sum  of  value  ” or  “ circulating  po-wer.”  It  is  very  signifi- 
cant, as  regards  this  group  of  definitions  of  capital,  that  their 
origin  may  be  traced  to  a slipshod  expression  of  a writer  who 
was  always  too  careless  about  the  way  in  which  he  stated  his 
conceptions — J.  B.  Say,  Say  first — and  quite  correctly — • 
gives  the  name  of  capital  to  certain  results  of  labour  that 
serve  as  tools  to  further  production,  such  as  Seed,  Dye-stuffs, 
Wool,  Tools,  Machines,  Buildings,  Cattle,  etc.,  and  calls  their 
total  value  Capital  Valua  Later  on  he  makes  the  remark 
that  a capital  value  may  take  very  different  forms,  such  as 
money,  houses,  utensils,  commodities,  etc.,  and  this  gives  him 
occasion  to  caU  “ this  value  a camtal.  so  soon  as  it  is  contained 
in  objects,  whatever  they  be,  which  are  destined  to  productive 
activity.”  ^ Evidently  a careless  and  contradictory  e:;cpression. 
which,  however,  his  economical  disciples  made  the  basis  of  a 
serious  theory ! - 

Thus,  of  all  the  many  readings  of  the  conception,  of  capital. 
there  is  only  one  left  on  the  field — only  one,  of  which  it  can  be 
said  that  it  has  stood  all  the  tests.  It  is  that  which,  by  capital,\ 
understands  an  aggregate  of  products  destined,  not  for  imme- 
diate consumption  or  use,  but  to  serve  as  means  of  acquisition. 
It  is  a conception  which  meets  aU  our  logical  and  terminoy 
logical  requirements.  Logically  it  is  unassailable,  and  it  is 
suggestive  ; so  suggestive  that  it  distances  the  most  of  its 
competitors,  and  is  distanced  by  none  of  them.  And, 
terminologically.  its  investiture  with  the  title  of  capital 
best  economises  our  terms,  and  agrees  with  that  usage  which 

^ Ccrwrs  Complet,  part  i.  chap.  viii.  It  may  be  added  that  Say,  in  this  and 
other  passages  formerly  quoted,  yives  no  less  than  four  contradi'^t'^ry  rpaHiT)fr<!  nf 
the  conception  of  capital.  In  one  place,  chapter  viii.,  he  explains  it  as  products 
of  labour  which  serve  towards  production  ; and  in  the  same  chapter  he  speaks  of 
it  as  the  of  these  products.  In  chapter  x.  (see  above,  p.  50)  he  makes  it 
the  talents  and  skill  of  the  labourers  ; and  in  chapter  xiii.,  again,  the  J2erae2i4,  of 
the  labourers  ! 

® That  theories  of  such  doubtful  value  should  commend  themselves  to  the 
recognition  of  eminent  jurists  like  Kiihnast  may,  perhaps,  be  explained  by  point- 
ing out  that  jurists,  as  having  to  deal  in  their  systems,  to  a very  great  extent, 
with  abstract  persons  and  objects,  have,  generally,  a strong  tendency  to  divpns- 
conceptions,:  a practice  which  may  bo  quite  suitable  for  their  special  field 
of  investigation,  but  is  certainly  misapplied  in  political  economy. 


60 


COMPETING  CONCEPTIONS  OF  CAPITAL  book  i 


has  taken  most  general  and  firm  root  in  economics  and  in 
popular  speech.  Finally,  it  is  the  conception  which  most 
exactly  coincides  with  the  object  of  those  great  social  problems 

of  our  time  which  people  are  in  the  habit  of  discussing  as 
problems  of  capital.  In  its  one  division,  as  “ Social  Capital,” 
it  indicates  the  third  instrument  of  economical  production  in 
the  triad  of  Nature.  Labour,  and  Capital : and  in  its  other 
division,  as  " Private  Capital,”  it  indicates  the  third  source  of 
the  economical  acquisition  of  goods  by  individuals  in  the  triad 
Rent  of  land.  Wage  of  labour.  Interest  on  capital,  If,  then, 
unbiassed  people  are  ever  to  agree  on  a conception  of  capital, 
we  may  expect  that  this  will  be  the  one  chosen. 


CHAPTEK  VI 


SOCIAL  AND  PRIVATE  CAPITAL 

A FEW  remarks  stiU  remain  to  be  made  on  the  relation  in 
which  the  two  divisions  of  our  conception.  Social  (or  Productive) 

Capital,  and  Private  (or  Acquisitive)  Capital,^  stand  to  one 

another.  When  enumerating  and  reviewing  the  various 
theories,  I have  already  expressed  my  views  generally  on  this 
point,  and  may  here  shortly  sum  them  up.  Private  Capita^, 
as  we  now  call  it,  is  the  parent  conception.  It  is  not  so 
much  a branch,  or  a subdivision  of  the  general  conception  of 
capital,  as  the  conception  itself.  The  conception  of  National 
Capital,  or,  more  correctly.  Social  Capital,  has  detached  itself 
from  the  other,  in  the  historical  development  of  theory,  as  a 
narrower  conception.  Substantially  it  is  a quite  independent 
conception.  In  every  essential  respect  (in  definition,  in 
scientific  employment,  and  in  scope)  it  stands  on  entirely 
independent  principles.  It  is  bound  up  with  the  conception 
of  Private  Capital  only  by  the  external  and  subordinate  cir- 
cumstance, that  the  aggregate  of  its  “ intermediate  products  ” 
happens  to  coiacide  in  extent  with  the  aggregate  of  those 
products  which  are  the  source  of  income  to  society  as  a whole, 
— those  products  which  constitute  capital  in  the  older  sense. 


^ As  I have  already  remarked  on  p.  38  I consider  the  terms  in  brackets, 
Productive  and  Acquisitive  Capital,  as  essentially  the  more  appropriate.  But 
since  Rodbertus  and  Wagner  the  terms  National  and  Private  capital  have 
been  used  almost  universally,  and  as  I consider  it  conducive  to  the  final 
settlement  of  this  jumble  of  terminology  not  to  disturb  names  that  are  fast 
rooted  in  common  usage,  unless  there  is  some  quite  overwhelming  reason 
for  doing  so,  I content  myself  with  making  the  one  change — which  seems  to 
me  in  any  case  indispensable — of  the  term  “National”  into  the  term  “Social” 
capital. 


62 


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BOOK  I 


But  through  a historical  accident  it  is  this  subordinate  feature 
that  has  had  most  to  do  with  the  narm'np-  of  the  new  concep- 
tion; and  thus  it  also  bears,  and  will  perhaps  continue  to 
bear,  the  name  capital.  And  this  circumstance,  so  long  as  the 
whole  relation  was  not  clearly  understood,  led  to  the  lament- 
able jangle,  so  often  spoken  of,  that  not  only  the  concep- 
tions themselves,  thus  similarly  named,  but  the  fundamentally 
distinct  problems  connected  with  them,  were  confused  and 
interchanged. 

This  unfortunate  confusion  of  the  problems  was  first . 

attacked,  so  far  as  I know,  by  Bodbertus.  and  his  efforts  were 
seconded  with  peculiar  clearness  by  Adolf  Wagner.  In  the 
course  of  this  a new  interpretation  was  given  to  the  distinction 
between  National  and  Private  capital,  which  is  highly  interest- 
ing in  itself,  and  which,  at  the  same  time,  has  been  accepted  so 
quickly  and  over  so  wide  an  area  that  I feel  bound  to  take  up 
a definite  position  towards  it.  Wagner,  like  Eodbertus  before 
him,^  makes  a distinction  between  capital  as  a “ purely  economic 
category,”  and  capital  “ in  the  historico-legal  sense.”  or  propgriy 
in  capital.  “ Capital  as  a purely  economic  category,  considered 
apart  from  the  legal  relations  which  obtain  as  regards  property 
in  capital,  is  a store  of  those  economic  goods, — natural  goods, 
— which  serve  as  technical  instruments  to  produce  new  goods 
to  a community  ; it  is  a store  of  .productive  insfrumentij ; it 
is  National  capital  (or  a portion  of  such).  Capital  in  the 
historico-legal  sense.,  or  property  in  capital,  is  that  portion  of 
a person’s  wealth  which  may  serve  him  as  a me^ns  of  obtain- 
ing an  income  fPent.  Interest),  and  which,  therefore,  is  owned 
by  him  to  this  end ; it  is  a Eent  Fund,  or  Private  Capital.”  ^ 
In  this  the  distinction  between  National  capital  and  Private 
capital  is  narrowed  down  to  the  distinction  between  a natural 
.store  of  goods  on  the  one  hand,  and  the  legal  rights  which 
private  individuals  have  over  that  natural  store  on  the 
other. 

I am  far  from  denying  the  very  great  importance  an(^ 
usefulness  of  this  new  distinction.  Its  appearance  was  an  event 

^ See  particularly  Zur  Erkldrung  nnd  Ahhilfe  der  heutigen  KredUnoth  des 
CrTundbesitsxs,  second  edition,  vol.  i.  p.  90,  vol.  ii.  p.  286,  where  das  reals  KapUal, 
as  consisting  of  the  natural  objects  of  capital,  is  sharply  opposed  to  KapitalbesUz, 
or  property  in  capital.  Similarly  Das  Kapital,  pp.  304,  313,  and  passim. 

® Wagner.  Grundlegung,  second  edition,  p.  39. 


CHAP.  V! 


PRIVATE  V.  PROPERTY  IN  CAPITAL 


63 


of  the  first  rank  in  economic  criticism,  and  it  has  done  good  and 
laudable  service  in  clearly  stating  the  fundamentally  distinct 
problems  associated  with  the  one  name  of  capital.  Without 
it,  certainly,  the  far-reaching  consequences  of  the  other  dis- 
tinction, that  between  Social  and  Private  Capital,  would  never 
have  been  noticed.  One  thing,  however.  I cannot  allow.  It., 
does  not  exhaust  the  meaning  of  this  latter  distinction,  and, 
rnnspqiiPTitly,  it  is  not  exactly  fitted  tn  ta.kp  its  place.  The 
categories  of  Social  Capital  and  Private  Capital  on  the  one 
hand,  and  of  Natural  Capital  and  Property  in  Capital  on  the 
other,  do  not  coincide,  either  in  compass  or  in  content,  so  as 
to  allow  us  simply  to  explain  or  replace  the  former  by  the 
latter.  They  are  rather  independent  categories,  each  of  them 
resting  on  a different  basis  of  distinction.  Social  Capital 
and  Private  Capital  are  not  distinguished  from  each  other 
simply  as  a natural  store  of  goods  and  property  in  these  goods  ; 
they  represent  two  distinct  natural  stores  of  goods.  Social 
Capital  embraces  only  the  means  of  production  : Private  Capital 
embraces  also  certain  consumption  goods.  These  distinct 
natural  quantities  or  stores  of  goods,  further,  exert  distinct 
economic  functions.  And  if  to  these  we  add  the  further 
distinction  that  Social  Capital  is  a category  independent  of 
any  regulations  of  positive  law. — is,  that  is  to  say,  a purely 
economic  category, — while  all  capital  as  Source  of  Income 
presupposes  an  owner,  and  therefore  a T;~ig]it  of  ownership 
foimded  on  history  and  law,  then  this  is  only  one  dist,iTictjniT] 
out  of  many,  and  that  not  the  peculiar  and  essenlial-distinction, 
For  if  we  were  to  drop  the  two  former  distinctions,  and  draw 
our  dividing  hne  ■ according  to  the  absence  or  presence  of 
historico-legal  claims  of  ownership,  we  should  find  that  the 
division  had  made  some  very  considerable  changes  in  the 
constitution  of  the  members.  In  the  first  branch,  indeed,  we 
should  have  as  before  Social  Capital,  the  natural  means  of 
production.  But  in  the  second  branch  we  should  have  only 
the  same  means  of  production  now  looked  at  as  private 

property  and  as  source  of  rent,  and  we  should  nor,  have 
those -Consumption  goods._  such  as  dwelling-houses,  libraries, 
etc.,  which  serve  as  sources  of  rent.  To  cover  these  latter, 
and  so  fill  out  the  compass  of  private  capital  to  its  true 
extent,  we  must  set  against  the  natural  means  of  production 


64 


SOCIAL  AND  PRIVATE  CAPITAL 


BOOK  I 


not  only  private  claims  based  on  history  and  law,  but  alsQ 


another 


extensile. 


Perhaps  the  peculiar  inappropriateness  of  confusing  these 
two  distinctions  may  be  most  strikingly  shown  by  taking  an 
exactly  analogous  example.  If  one  were  asked  to  characterise 
the  distinction  between  the  two  conceptions  “ producing  ” and 
“exchanging.”  and  were  to  answer  that  production  is  a purely 
economic  category,  whilst  exchange,  as  presupposing  the  exist- 
ence of  private  property,  is  a historico- legal  phenomenon, 
the  answer  would,  scarcely  be  taken  as  sufficient.  We  should 
certainly  have  the  impression  that  it  gave  us  a distinction  but 
not  the  distinction  between  producing  and  exchanging.  For 
the  essence  of  exchanging  obviously  does  not  consist  in  its 
being  a “ historico-legal  category.”  It  is  also  a very  important 
economic  category;  indeed,  it  is  just  such  another  as  produc- 
ing ; and  one  who  would  explain  both  conceptions  must,  at 
once  and  before  anything  else,  establish  the  distiurtinn  bp.twpp.Tj 
the  mmoviic  nature  of  the  two.  And,  similarly,  in  this 
opposition  between  “ purely  economic  ” and  “ historico-legal  ” 
categories,  a distinction  is  put  forward — and  a very  important 
distinction, — but  not  the  characteristic  distinction  between 
Social  and  Private  Capital. 

Let  me  say  once  more  that  I consider  the  distinction  made 
by  Rodbertus  and  Wagner  between  natural  capital  and  pro- 
perty in  capital  a very  important  one  indeed,  and  one  which, 
in  any  case,  must  also  be  drawn.  What  I want  to  point  out 
is,  that  it  should  not  be  confused  with  the  distinction  between 
^c.ia.l  a.nd  privat.c  capital,  which  rests  on  an  entirely  diffcrcrit 
basis ; and  the  definition  of  social  and  private  capital  should 
not  be  based  on  characteristics  borrowed  from  another  and 
totally  different  distinction. 

The  exanrple.  of  Rodbertus  himself  is  the  best  proof  that 
this  is  not  simply  a quarrel  about  formulas..-  His  one-sided 
conception  led  him  directly  into  a false  theory  of  interest.  In 
his  view  the  essence  of  private  capital  consisted  in  the  historico- 
legal  circumstances  of  force  that  were  connected  with  it : and 
he  was  thus  logically  committed  to  explain  the  interest  on 
private  capital  simply  and  solely  from  the  existence  of  those 
circumstances.  Interest  to  hiimvas  robbery : a profit  whieh- 


.capital  squeezed  out  of  the  labourers  in  virtue  of. 


CHAP.  VI 


CONTENTS  OF  THE  FORMER 


65 


t.hp.  bi-ntfi  strength  which  their  exclusive  property  in  the  means 

of  production  p^ave  theiTL.^ 

If,  on  the  other  hand,  Eodbertus  had  attended  to  the 
pecuharly  economic  side  of  the  matter,  he  would  have  found 
that  that  other  natural  complex  of  goods,  called  private  capital. 
has  exerted  and  contimies  to  exert  a peculiar  economic  function 

quite  equally  with  social  capital ; and,  further,  he  would  have 
found  that  it  is  simply  as  the  natural  fruit  of  this  economical 
element  that  interest  originates.  Thus  he  would  have  found 
that  interest  is  not  purely  a growth  of  historv-and - law.r-huh 
an  original  economic  growth,  the  emergence  of  which  is,  to  a 
certain  extent,  independent  of  the  form  which  history  and  law 
have  given  it.  This  will  be  shown  with  sufficient  clearness, 
I trust,  in  the  investigations  into  the  origin  of  interest  which 
foUovv. 

Before  concluding  this  chapter  there  is  still  one  question 
to  be  put  ; Whipt  in  t.Vie  PQpprete  are  the  groups  of  gOods  that 
constitute  Social  capital,  and  what  Private  capital?  The 
answer  to  this  should,  by  rights,  follow  from  the  very  definition 
of  the  two  conceptions.  But  pecuhar  circumstances  have  led 
to  disputes  not  only  as  to  the  correct  definition,  but  even  as 
to  the  compass  which  was  to  be  allowed  to  each  conception  in 
conformity  with  the  accepted  definition.  It  is  well,  therefore, 
to  be  quite  clear  on  this  point. 

Sncjfil  Capital  es  an  aggregate  of  products  destined  to  serve 
for  further  prnduetinu^  envers 

1.  Productive  improvements,  arrangements  and  disposi- 
tions of  lanch  so  far  as  these  preserve  an  independent  character, 
such  as  dams,  drains,  fences,  etc.  So  far,  however,  as  they 
are  completely  incorporated  with  the  land,  they  are  tn  bp.  kept 
separate  from  capital  for  the  same  reasons  which  made  us 
keep  land  itself  separate  from  capital.^ 

2.  Productive  buildings  of  aU  sorts — workshops,  factories, 
sheds,  steadings,  shops,  streets,  railways,  and  so  on.  DweUing- 

^ See  my  criticism  of  this  theory  in  Capital  and  Interest,  p.  337.  y 

‘ I may  he  accused  of  want  of  logic  here  on  the  ground  that  such  improve- 
ments are  always  products  which  serve  towards  further  production,  and  therefore 
come  under  our  definition  of  capital.  The  criticism  is  correct  as  to  the  letter, 
but  wrong  as  to  the  spirit.  A stay  propped  up  against  a tree  is  certainly  not 
the  tree  itself  but  an  outside  body.  But  who  would  still  call  it  an  outside  body 
if  after  some  years  it  had  grown  inseparable  from  the  tree  ? 


66 


SOCIAL  AND  PRIVATE  CAPITAL 


BOOK  I 


houses,  however,  and  other  kinds  of  buildings,  such  as  serve 
immediately  for  any  purpose  of  enjoyment  or  erlucatinr)  or 
culture,  e,.g.  theatres,  schools,  churches,  law  courts,  do  not 
come  under  Capital 

3.  Tools,  machines,  and  other  kinds  of  productive  utensils. 

4.  Useful  animals  and  beasts  of  burden  employed  in  pro- 
luction. 

5.  The  raw  and  auxiliary  materials  of  production. 

6.  Finished  consumption  gooda  in  the  hands  of  producers 
id  merchants  as  (warehouse)  stock. 

7.  Money,  \ 

At  the  first  glance  the  two  latter  categories  may  be  called 

in^uestion.  Consumption  goods  as  found  in  warehmi.ses  are,  to 
all  appearance,  no  longer  “ intermediate  products,”  but  “ finished 
goods,”  and  Money  is  not  a tool  of  production  but  a tool  of 
exchange.  Still,  I think  it  correct  to  put  both  conceptions 
under  capital.  3'hev  both  serve  to  complete  a joundahout 
i^T-of . production.  When,  in  order  to  take  advantage  of  more 
favourable  conditions,  goods  are  produced,  or  caused  to  be 
produced,  at  a different  place  from  where  they  are  demanded, 
it  is  nothing  else  than  a peculiar  kind  of  roundabout  process. 
The  consequence  then  is — and  it  is  here  that  the  “round- 
aboutness,” which  is  to  be  understood  hterally  in  this  case, 
comes  in. — that,  after  the  product  is  technically,  finished,  JL 
must  be  conveyed  to  the  place  where  it  is  demanded-  All 
this  is  done  very  often  inside  the  narrow  limits  of  an  isolated 
economy ; the  peasant  must  bring  his  harvested  grain  from 
the  field,  his  felled  wood  from  the  forest.  But  it  is  done,  on 
an  immensely  greater  scale,  in  the  wider  field  of  social  produc- 
tion and  divided  labour.  Just  as  the  peasant  may  raise  his 
crop  a quarter  of  an  hour’s  distance  from  his  house,  or  cut  his 
wood  an  hour’s  distance  off,  because  in  this  way  he  can  best 
utilise  the  conditions  of  production,  so  for  good  reasons  it  is 
quite  common  in  organised  and  divided  industry  to  obtain  the 
objects  of  our  demand  from  other  people’s  workshops,  indeed 
often  from  other  places,  other  lands,  other  continents;  and  then, 
naturally,  in  the  end  we  have  to  provide  their  means  of 
conveyance.  In  the  one  case  as  inALe-  other  the  conveyance 
forms  the  last  act  of  production,  and  before  this  last  act  is 
finished  we  cannot  properly  say  that  the  products  are  ready 


CHAP.  VI 


MAINTENANCE  OF  LABOURERS 


67 


for  human  consumption.  So,  just  as  everybody  would  include 
among  instruments  of  production  and  capital  the  horse  and 
cart  which  assist  the  peasant  in  carrying  in  his  grain  and 
wood,  must  we  reckon  as  capital  the  objects  and  apparatus  of 
that  more  extensive  “ leading  in  ” of  the  national  harvest — the. 
conveyed  products,  the  streets,  rads,  ships,  and  the  oommercial 

tool  money.  It  may  he  noted,  besides,  that  those  commercial 
roimdabout  ways,  arising  out  of  the  division  and  organisation 
of  labour,  rank,  as  regards  the  advantage  they  confer,  along 
with  the  other  technical  roundabout  ways^  They  are  as 
profitable  as,  or  even  more  profitable  than,  any  of  the  capitalist 
methods  of  production  to  which  the  most  famous  technical 
inventions  have  led. 

These  seven  categories  exhaust,  in  mv  opinion,  the  group 

of  things  which  constitute  Social  Capital/  It  goes  without 
saying  that  economists  who  take  another  view  of  the  concep- 
tion of  capital  add  other  categories,  such  as  land,  durable 
consumption  goods,  the  person  of  the  labourer,  and  so  on, 
and  this  needs  no  further  elucidation  here.  It  is  surprising, 
however,  to  find  writers,  who  take  exactly  the  same  view  of 
the  conception  as  we  do,  proposing  to  add  certain  other 
categories. 

Most  surprising  of  all  in  this  connection  is  the  unanhnity 
with  which  economists,  from  the  earlier  Enghsh  writers  down 
to  Adolf  Wagner,^  nut  the  maintenance  of  yrndvravp.  lahmirem, 
under  social  capital.  Certainly  the  real  wages  of  the  lahojirers 
— the  articles  of  food,  clothing,  fuel,  lighting,  etc.,  which  the 
labourers  use — are,^  from  the  standpoint  of  the  undertaker 
who  advances  them,  his  ^wivatp,  capb^l.  But  it  is  just  as 
clear  in  my  opinion  that,  from  the  standpoint  of  the  whole 
community,  these  objects  cannot  be  counted  capital  if  capital 
is  defined  as  a complex  of  means  of  production.  The  conception 
of  “ means  of  production  ” should  and  does  form  an  antithesis 
to  the  conception  “means  of  consumption.”  There  cannot  be 
the  slightest  doubt  as  to  the  meaning  of  this  antithesis,  and 
just  as  little  can  there  be  as  to  the  fact  that  the  workers’ 
subsistence  is  the  immediate  instrument  to  the  satisfaction  nf. 
their  wants,  and  that  labourers  are  men  and  members  of 
society.  But  if  this  is  so,  it  seems  to  me  absolutely  proved 

, ^ Grundlegung,  second  edition,  pp.  39,  43. 


68 


SOCIAL  AND  PRIVATE  CAPITAL 


BOOK  1 


that  the  maintenance  of  the  labourer  must  hp,  claasftd  along 
with  wealth  destined  for  consinription  and  for  the  immediate 
satisfaction  of  the  wants  of  society,  and  not  with  the  means  of 
production  or  capital.  It  could  only  he.  otherwise  if  tln^. 
labourers  were  to  be  looked  upon,  not  as  members  of  the  civil 
society  in  whose  interest  industry  and  commerce  are  carried 
on,  but  as  7naf,erial  machines  of  labour.  Then,  but  only  then, 
the  maintenance  of  the  labourers  would,  as  a matter  of  course, 
fall  under  the  same  category  as  the  feeding  of  beasts  of  burden 
and  the  stoking  of  furnaces ; it  would  be  a means  of  produc- 
tion, or  capital.  The  idea,  however,  scarcely  needs  refutation. 

It  may  be  pointed  out,  however,  that  productive  labourers 
are  not  simply  consuming  subjects,  but  are  also  active 
economical  instruments  ; and  that,  consequently,  the  subsistence 
which  does  directly  serve  for  the  maintenance  and  furtherance 
of  their  life  indirectly  serves  towards  the  further  production 
of  goods.  But  in  this  case  a simple  indirect  relation  to 
production  is  not  sufficient.  For  it  is  easy  to  see  that  the 
distinction  between  means  of  production  and  means  of  con- 
sumption has  a meaning  only  if  it  refers  to  the  immediate 
destination  of  goods.  If  we  were  to  take  notice  of  their 
indirect  or  mediate  destination  we  should  require  to  put  all 
goods  without  exception  under  the  category  of  means  of 
consumption,  since  even  the  means  of  production  serve  in- 
directly to  the  satisfaction  of  human  wants.  Then  this  raises 
another  difficulty.  The  division  of  goods  into  goods  for 
consumption  and  goods  for  production  is  intended  to  be  a real 

division ; it  should  be  based  on  an  opposition.  Now  it  is 
impossible  to  deny  that  the  food  which  the  labourer  consumes 
serves  for  the  immediate  satisfaction  of  the  wants  of  a member 
of  the  community ; that  is,  it  corresponds  entirely  to  the 
definition  of  a consumption  good.  How  then  could  we  class  a 
thing  which  has  all  the  properties  of  category  under  the 
category  opposed  to  it  ? Thus,  as  is  so  often  the  ease,  the 
laboured  explanation  leads  us  into  a net  of  confusion,  and  the 
simplest  is  the  truest.  The  goods  with  which  the  working 
meniljers  of  the  community  feed,  heat,  and  clothe  themselves, 
are  goods  for  immediate  consumption,  not  means  of  production. 

That,  in  face  of  arguments  so  obvious,  the  opposed  doctrine 
should  be  held  so  universally  and  so  tenaciously  is  a pheno- 


CHAP.  VI 


MAINTENANCE  OF  LABOURERS 


68 


menon  scarcely  intelligible  at  first  sight,  but  easily  explained 
when  we  inquire  more  closely  into  the  circumstances  of  the 
case.  Two  powerful  factors,  I think,  co-operated  towards  it. 
One  was  historical  tradition,  which,  in  this  case,  was  very 
strong  and  deep-rooted.  It  should  not  be  forgotten  that  the 
inclusion  of  the  labourers’  maintenance  into  the  conception 
of  capital  came  at  a time  when  the  conception  itself  was  not 
yet  clearly  defined,  and  when,  in  particular.  Private  capital,  to 
which  the  labourers’  maintenance  in  any  case  belongs,  was  not 
yet  sharply  divided  off  from  Social  capital,  to  which  it  does  not 
belong.  This  was  assisted  by  the  peculiar  view,  dominant  for 
a long  time,  that  the  function  of  capital  was  the  " putting  of 

labour  in  motion  ” — a function  which  the  labourers’  main- 
tenance conspicuously  realised.  It  was,  assisted,  moreover,  by 
the  famous  Wage  Fund  theory.  That  theory  made  the  rate  of 
wages  depend  chiefly  on  the  proportion  between  the  number  of 
labourers  and  the  amount  of  the  Wage  Fund ; that  is,  the 
amount  of  capital  destined  for  the  support  and  payment  of  the 
labourers — an  idea  which  helped  to  connect  the  means  of  sub- 
sistence still  more  closely  with  the  conception  of  capital.  And, 
finally,  another  impulse  in  the  same  direction  may  have  been 
given  by  the  frequently  and  justly  criticised  tendency  of  th^. 
English  school  to  look  unon  the  labourer  as  a machinfi  of 
production,  and  to  consider  his  wage  simply  as  an  element  of 
the  costs  of  production — a deduction  from  the  national  income 
and  not  a part  of  it.^ 

Eesting  on  such  a wide  basis  of  support,  the  proposition 
that  the  maintenance  of  productive  labourers  forms  an  element 
in  Social  capital  worked  its  way  by  degrees  so  firmly  into  the 
scientific  consciousness,  that  it  was  considered  by  many  as  an 
axiom  quite  above  discussion ; and  in  the  end  it  was  able  to 
maintain  its  position  on  the  strength  of  its  own  authority, 
even  after  the  ground  had  really  been  taken  from  under  it  by 
4Jie  distinction  between  Privat.ft  anrl  Sopin] 
capital,  and  by  the  definition  of  the  latter  as  an  aggregate  of 
means  of  production. 

The  second  factor  has  had  even  more  effect  than  the 
weight  of  historical  tradition  ; and  not  only  has  it  co-operated 
in  the  past  in  the  creation  of  these  traditions,  but  it  still 

^ See  ScLmoller,  Tuhinger  Zeitschrift,  vol.  xix.  (1863),  pp.  10,  25. 


70 


SOCIAL  AND  PRIVATE  CAPITAL 


BOOK  I 


asserts  its  living  influence.  That  factor  was,  if  I am  not 
very  much  mistaken,  the  conscinus  or  uncnuscious  inclination 
towards  another  reading  of  the  conception  of  capital  than  that 
recognised  in  what  we  may  call  the  official  definition.  Econo- 
mists have  stood,  and  still  stand,  in  hesitation  between  those 
two  conceptions  which  have  the  most  numerous  and  suggestive 
relations  to  the  problems  of  capital — tbe  conception  of  “ pro- 
duced means  of  production”  and  the  conception  of uatinua.l 
subsistence  fund.”  ^ In  the  official  definition,  it  is  true,  ,the 
preference  was  finally  given  to  the  “ produced  means  of 
production  ” ; but  economists,  quite  rightly  feeling  that  the 
“ national  subsistence  fund  ” had  also  something  to  do  with 
the  theory  of  capital,  could  not  quite  give  up  this  con- 
ception. And  thus  they  put  together  a hybrid  conception, 
adding  to  the  Men,ns  of  Production— proper . which  had  the 
stamp  of  the  official  definition,  a portion  of  the  Subsistence 
Fund  conception,  in  the  maintenance  of  productive  labourers. 
Of  course  a classification  like  this,  which  is  nothing  else  than 
the  result  of  uncertainty  and  compromise,  cannot  be  satis- 
factory. Economic  theory  must  make  decisive  choice  between 
the  two  competing  conceptions,  and,  however  the  choice  turns 
out,  the  conception  will,  be  limited  and  determined  other- 
wise than  it  is  by  the  writers  now  being  criticised.  Either 
wp.  shall  decide  for  that  conception  which  makes  capital 
an  aggregate  of  Intermediate  Product j — and  this  choice,  for 
reasons  of  appropriate  terminology  already  stated,  I consider 
the  happier  one — and  in  this  case  the  labourers’  mainten- 
ance falls  outside  the  conception ; or  we  shall  give  the  name 
capital  to  the  Subsistence  Fund  which  makes  the  roundabout 
way  of  prndup.tinn  possible,  and  then,  as  will  be  shown  later,® 
not  only  must  the  means  of  subsistence  of  the  productive 
labourers  be  reckoned  as  capital,  ^ut  also  the  subsistence  of 
the  capitalists  and  landowners,  as  standing  in  exactly  the  same 
indirect  relation  to  the  adoption  of  “capitalist”  methods  of 
production.  If  all  this  cannot  justify,  it  may  at  least  explain 
the  phenomenon  otherwise  almost  incomprehensible,  that,  in_ 
flat  contradiction  to  the  official  definition^  of  capital.,  people 
continue  to  add  to  it  the  maintenance  of  _tlie,_Iab.auifira ; and 


1 See  above,  p.  42. 

® See  also  above,  p.  43,  note  1. 


CHAP.  VI 


CONTENTS  OF  THE  LA  TTER 


71 


perhaps  the  exposure  of  this  origin  may  help  to  put  an  end 
to  the  curious  habit.^ 

Another  category  which  seems  In  mo  wrongly  pla.cod  a.moug 
the  constituents  of  Social  capital  is  the  so-called  “ incorporeal 

capitals,”  such  as  debts  and  other  kinds  of  claims,  goodwill  of 
businesses,  the  state,  etc.  These  things  are  not  capital,  because 
they  are  not  real  goods.  They  are,  as  I have  shown  at  length 
in  another  place,^  nothing  but  representative  words  or  collect- 
ive names  for  a sum  of  real  goods,  which  may  be  capital, 
or  may  not.  If  they  are,  then  they  are  already  contained  in 
our  seven  categories ; if  they  are  not,  we  should  not,  of  course, 
open  a.  special  category  for  them. 

Finally.  Private  capital  consists  of  the  following  : — 

1.  All  goods  which  form  Social  capital 

2.  Those  consumption  goods  which  their  owners  do  not 
use,  for  themselves,  but  employ  by  exchange  (sale,  hire,  loan) 
in  the  acquisition  of  other  goods,  e.g.  let-houses,  lending- 
libraries,  means  of  subsistence  advanced  by  undertakers  to 
their  labourers,  and  many  others. 

^ The  case  is  exactly  the  same  with  the  notorious  Wage  Fund  theory.  In  it 
also  I see  a misbegotten  fruit  of  an  idea  which  is  quite  right  in  itself.  It  is,  as 
we  shall  see  later,  a very  unsuccessful  attempt  to  express  certain  relations  that 
really  do  exist  between  the  national  subsistence  I’und  on  the  one  hand,  and  the 
height  of  wage  and  interest  on  the  other.  Against  the  inclusion  of  the  labourers’ 
means  of  subsistence  in  national  capital  Eodbertus  has  expressed  himself  in  a 
quite  classical  style.  Das  KapUal,  p.  294,  and  before  that  in  his  Zur  Erkenntniss 
unser.  stautsw.  Zustdnde,  theorem  i.  Very  clear  and  convincing,  too,  is  Gide, 
Prindpes  PEcmomie  Politique,  Pans,  1884,  p.  150.  See  also  Sax,  Grundlegung, 
p.  324,  note. 

^ Rechte  und  Verhaltnisse  vom  Standpunkte  der  volks.  (PHerlehre,  1881,yas«7n. 
Since  then,  see  H.  Dietzel  {Der  Ausgangspv,nkt  der  Socialwirthsehaftslehre  und 
ihr  Grundbegriff,  in  the  TiiMiiger  Zeitsehrift,  1883,  p.  78),  and  Sax  {Grundlegung, 
pp.  39,  199),  who  surely  goes  too  far  in  excluding  personal  service  from  the  con- 
ception of  goods.  Neumann,  on  the  other  hand  (Schonberg’s  Handhuch, 
second  edition,  p.  151),  remains  firm  in  recognising  rights  and  relations  as  real 
goods  on  grounds  which  do  not  commend  themselves  to  me  as  at  all  convincing. 
On  one  single  point  I feel  myself  bound  to  reply.  In  my  definition  of  the  con- 
ception of  goods,  Neumann  “does  not  find”  the  lines  sufficiently  distinctly 
drawn,  and  quotes,  in  a tone  of  irony,  a number  of  expressions  which,  taken  by 
themselves,  certainly  do  not  draw  any  distinct  line  {ibid,  note  41).  But  Neu- 
mann can  only  have  read  portions  of  the  work  he  objects  to,  or  read  it  very 
hurriedly.  Otherwise  it  would  not  have  escaped  him  that  the  expressions  he 
quotes  stand  at  the  end  of  a chapter  {Rechte,  p.  29),  and  that  the  beginning  and 
middle  of  that  chapter  (p.  13  onwards)  are  devoted  to  what  he  “ does  not  find,” 
and  that,  obviously,  the  later  expressions  are  to  be  taken  and  understood  along 
with  what  goes  immediately  before. 


72 


SOCIAL  AND  PRIVA  TE  CAPITAL 


BOOK  I 


Many  writers  add  p.p.rhain  “ rp-Iationa/’  trade  con- 

nection,^ legal  claims.®  These,  of  course,. on  the  same  grounds 
of  theory  as  above.  I must  reject  as  constituting  an  independent 
category  of  capital. 

And  now,  after  this  very  lengthy  introduction,  which  can 
only  be  excused  by  the  singular  confusion  in  which  we  found 
the  theory,  we  may  turn  from  the  conceptions  to  the  prob- 
lems which  are  associated  with  them.  In  the  book  which 
follows  we  shall  work  out  the  theory  of  the  conception  we  had 
to  glance  at  in  the  two  first  chapters  of  the  present  book ; the 
theory  of  capital  as  Tn.strument  of  Production,  or  the  theory 
of  Social  Capital.? 

^ Wagner,  Grundlegung,  second  edition,  p.  42. 

^ Reseller,  Grundlagen,  eighteenth  edition,  § 42. 

® Hermann,  StaMs.  Untcrsuchungen,  second  edition,  p.  122. 

* The  careful  reader  will,  without  doubt,  have  remarked  that  the  statement 
as  to  the  nature  of  capital  given  in  the  second  chapter,  relates  solely  to  Social 
economic  capital.  For  obvious  reasons  I did  not  wish  to  mix  up  the  dogmatic 
statement  with  the  terminological  and  critical  discussion  which,  I am  afraid,  has 
been  terribly  prolix.  And,  for  reasons  as  obvious,  I did  not  wish  to  commence 
this  discussion  without  having,  at  least  partially,  put  before  my  readers  the  object 
to  which  the  discussion  refers.  I therefore  made  use,  for  the  time  being,  of  the 
word  Capital  without  any  of  the  clauses  and  additions  which  would  at  once  have 
necessitated  the  tedious  terminological  discussions  I wished  at  the  time  to  avoid. 
The  more  exact  explanations  which  follow  will  prevent  any  misunderstanding  to 
which  this  may,  perhaps,  have  given  rise. 


BOOK  II 


CAPITAL  AS  INSTEUMENT  OF  PEODUCTION 


CHAPTEE  I 


INTRODUCTORY 


In  expounding  the  theory  of  capital  as  Instrument  or  Tool  or 
Means  of  Production  we  have  to  describe  and  explain  the 
emergence  and  effects  of  capital  in  the  economic  production 
of  goods.  What  we  have  to  say  on  this  matter  groups  itself  > 
round  two  questions : How  does  capital  originate  ? and  what^ 
is  the  nature  of  its  productive  work  ? The  first  question  has 
to  do  with  the  theory  of  the  formation  or  accumulation  of 
capital ; the  second,  with  the  productive  function  of  capital 
The  reader  who  has  waded  with  us  through  the  dozen 
theories  and  dozen  definitions  of  capital  will  scarcely  be  sur- 
prised at  meeting  a similar  divergence  of  opinion  on  the  ques- 
tion we  have  now  to  consider.  Of  course  there  is  no  dispute 
about  the  fact  that  capital  is,  in  the  highest  degree,  useful  tc^ 
production.  But  I am  much  afraid  that  this  is  the  only 
proposition  on  which  our  economists  are  quite  agreed.  So 
soon  as  the  further  question  is  asked : In  what  does  this  Y 
usefuhiess  consist,  or  what  character  does  the  co-operation  of 
capital  in  itself  bear  ? — agreement  is  at  an  end.  One  finds 
the  utility  of  capital  in  putting  labour  in  motion ; another,^ 
in  saving  or  supplanting  labour ; ^ a third,  in  performing! 
labour ; ® a fourth  praises  it  as  gi^dng  man  the  mastery  over 
the  powers  of  nature ; ^ and  a fifth,  as  enabling  the  labourer, 
to  “ put  an  interval  1 letween  the  beginning  and  the  end  of  an-i 


^ Adam  Smith,  book  ii.  chap  v. 

^ Lauderdale,  Enquiry,  p.  161,  passim. 

® Lauderdale,  ihid.  So  also  J.  B.  Say,  “11  faut,  pour  ainsi  dire,  que  les  capitaux 
travaillent  de  concert  avec  I’industrie”  {TraiU,  i.  3). 

^ Strasburger,  Hildebrand’s  Jahrhiicher,  vol.  xvii.  (1871),  p.  325  ; and  Carey. 


76 


INTRODUCTORY 


BOOK  II 


enterprise.”  ^ Some,  like  Lauderdale,  see  in  it  an  independ- 
ent, original  factor  of  production  along  with  land  and  labour ; 
others,  like  Gide,  call  it  an  independent  but  still  merely 
derivative  factor.  Kleinwachter  looks  on  it  simply  as  a 
“ condition  ” ; Carey,  again,  as  an  “ instrument  ” or  “ tool  ” of 
production.  Indeed,  our  theorists  cannot  even  agree  as  to  the 
wav  in  which  that  useful  auxiliary  of  production  comes  into 
existence.  If  we  ask  the  question  concretely  : How  is  a plane, 
or  a plough,  or  a steam-engine  made  ? — they  would  probably 
be  able,  with  perfect  certainty,  to  give  minute  information 
as  to  how  those  concrete  portions  of  capital  come  into  existence. 
But  whenever  they  have  to  generalise  what  they  have  observed, 
they  divide  into  hostile  camps.  Capital  originates  in  savings 
says  one ; no.  says  another,  it  must  be  produced  ; while  a 
third  proclaims  that  it  originates  in  the  two  together. 

It  is  a much  greater  cause  for  wonder  that  economists 
came  to  no  agreement  m these  and  similar  questions  than  that 
they  remained  apart  in  their  theories  of  interest.  The  task 
here  was  quite  different,  and  essentially  easier.  Tu  the  iutpresf, 
theory  the  difficulty  is  to  give  the  proper  explanation  of  facts 
which  are  really  much  entangled,  while  here  there  is  almost 
nothing  to  do  but  to  describe  the  facts  correctly ; and  facts, 
moreover,  with  which  everybody  is  quite  familiar.  As  we 
have  said,  every  one  knows  how  a plane  or  a steam-engine 
comes  into  existence.  Similarly  every  one  has  a sufficiently 
exact  idea  what  and  how  a plane,  a machine,  a plough,  a raw 
material,  does  in  production.  It  was  only  necessary  to  leave 
out  everything  pecuhar  in  those  cases,  and  to  describe  in 
appropriate  words  everything  universal  and  typical  in  them. 
and  the  theory  of  the  formation  and  function  of  capital  would 
mhnost  have  been  written. 

'C  The  reason  why  economists  failed  in  this  simple  task  was 
that  they  did  not  allow  the  facts  to  speak  for  themselves.^ 
Instead  of  simply  describing  them  as  they  were,  explanations 
were  read  into  them  and  added  to  them ; one  feature  was 
pushed  into  the  foreground,  another  kept  in  the  background, 
a third  was  quite  overlooked,  while  perhaps  a fourth  was 
entirely  absent,  but  was  read  into  them.  When  every  man 
had  thus  imported  his  own  particular  views  bodily  into  the 
1 Jevous,  Theory  of  Political  Economy,  second  edition,  1879,  p.  243. 


CHAP.  I 


INTRODUCTORY 


77 


facts,  it  was,  of  course,  no  wonder  that  everybody  got  some- 
thing different  out  of  them. 

To  my  mind  the  most  important  duty  of  the  theorist  in 
such  a case  is  to  avoid  the  faults  we  have  just  condemned. 
To  make  certain  of  this  we  shall  make  a clear  distinction,  even 

in  outward  form,  between  the  statement  of  the  facts  and  the. 

interpretation  of  them.  The  next  chapter,  therefore,  will 
delineate  and  describe  the  process  of  capitalist  production. 
When  a solid  basis  of  fact  has  thus  been  obtained,  the  inter- 
pretation and  construction  will  follow  in  the  chapters  on  the 
productive  fimction  of  capital,  and- on  the  theory  of  the  forma- 
tion of  capital.^ 

^ Tn  fipoTinniic  literature  the  cleare.st  views  as  to  the  nature  of  ca]ntalist  pro- 

duction are,  in  my  opinion,  to  be  found  in  Kodbertus.  Jevoiis.  and  QaT-l  Monjjgr 
The  works  of  Rodbertus,  where  they  are  not  directly  disfigured  by  the  influences 
of  his  one-sided  Socialist  standpoint,  are  of  quite  classical  accuracy  and  clearness. 
Unfortunately  there  are  certain  features  which  very  sensibly  mar  what  he  has 
said.  This  is  true  in  particular  of  his  omission  to  notice  the  share  which  the 
valuable  natural  powers  take  in  production,  and  the  influence  of  time — two 
things  which,  obviously,  could  not  easily  be  fitted  into  the  “exploitation” 
theory  he  maintained  so  vigorously,  and  so  were  suppressed.  We  shall  see  this 
more  fully  later  on.  Carl  Monger,  again,  by  his  arrangement  of  goods  according 
to  “rank”  {Orundsatze,  p.  7),  and  his  statement  of  the  laws  which  connect 
together  goods  of  various  ranks,  has  given  at  once  a brilliant  proof  of  his  clear 
insight  into  the  developed  phenomena  of  production,  and  an  invaluable  tool  to 
the  hands  of  succeeding  investigators. 


CHAPTER  II 


CAPITALIST  PRODUCTION 

We  have  already  sketched,  in  its  most  general  outlines,  the 
process  of  capitalist  production^  There  are  certain  features 
of  it  which  now  require  more  exact  treatment.  I shall  briefly 
recapitulate,  interpolating  what  remains  to  be  said  as  we  go 
I along. 

^ All  human  production  aims  at  the  obtaininp  of  goods  for 
consumption.  These  consumption  goods  are  dependent  for 
their  existence  on  physical  conditions,  and  are  subject  to 
natural  laws.  To  obtain  them,  as  we  have  seen,  we  must  seek 
to  bring  about  such  combinations  of  active  forces  as  will 
result  in  the  desired  object.  Thus  we  get  a product  which 
has  come  into  existence  under  natural  law  and  continues  to 
exist  under  natural  law.  Now  look  a httle  more  closely  at 
the  nature  of  the  power  which  man  can  employ  towards  these 
I productive  combinations.  It  is  made  up  of  two  components 
very  dissimilar  in  amount — ^rst.  an  enormous  -mass  of  powers 
which  the  natural  world  exerts  spontaneously  year  out  year 
in ; and  second,  the  much  more  limited  natural  powers  which 
reside  in  the  human  organism. 

The  natural  world,  in  midst  of  which  man  lives,  is 
endowed  with  a vast  number  of  forces  which  are  never  for  a 
moment  idle.  Gra^’itation  holds  this  ball  of  earth  together ; 
keeps  all  things  fast  to  its  surface ; makes  the  rain  fall  to 
earth,  and  rolls  streams  and  rivers  to  the  sea ; governs  the 
ebb  and  flood  of  the  tides ; works  unceasingly  at  every  point 
of  the  earth’s  crust  as  stress,  weight,  pressure.  The  -sun 
sends  our  earth  light  and  heat,  and  thereby  develops  an 

^ Book  i,  chap.  ii. 


CHAP,  II 


THE  SOLE  TECHNICAL  FACTORS 


79 


infinity  of  mechanical  and  chemical  procfesses,  of  which  vegeta»- 
tion  particularly  attracts  our  a,ttcntinTi.  both  by  its  mysterious 
magic  and  by  its  enormous  importance  for  the  human  race. 
Uncounted  and  countless  again  are  the  molecular,  electric,  and 
chemical  effects  and  counter -effects  which  every  atom  of 
matter  exerts  without  intermission  on  its  neighbours.  The, 
total  of  those  energies  which  nature  pours  forth  in  ceaseless 

strenm.  without  help  from  man,  we  may  look  upon  as  one 
branch  of  the  productive  endowment  of  humanity ; and  this 
extremely  valuable  branch  we  shall  call  man’s  natural. endow- 
ment. It  is  an  infinite  treasure-house  from  which  the  pro- 
dueiug  man  may  draw  as  much  as  he  wiU  and  can.  As  yet^/ 
it  is  only  the  very  smallest  part  of  thi.s  treasure  that  has 

been  touched.  As  yet  by  far  the  greater  portion,  of  the 
energies  of  nature  pass  away  in  combinations  which,  from  the 
human  teleological  standpoint,  seem  useless  or  even  haraiful. 
The  resistless  rise  and  fall  of  the  tide,  the  rush  of  rivers  and 
waterfalls,  the  atmospheric  movements,  the  giant  forces  of 
electricity,  magnetism,  and  gravitation  slumbering  iu  our 
earth,  are  powers  turned  to  human  account  only  to  a very 
small  extent.  Others  again,  such  as  the  vegetative  powers  of 
land,  have  been  utihsed  to  a greater,  but  .still  very  far  from 
complete  extent.  The  steady  advancement  in  agricultural 
science  not  only  leads  us  to  expect  a constantly  increasing 
amoimt  of  utility  from  the  land,  but  makes  us  suspect  that  the 
possibihty  of  such  advance  is  stiU  far  from  being  exhausted. 

Now,  as  we  have  seen,  the  way  in  which  we  get  command 
of  these  natural  treasures  is  through  the  other  branch  of  oru 
productive  endowment,  our  own  personal  powers.  We  put 
forth  our  labour  in  ail  kinds  of  wise  combinations  with  natural 
processes.  Thus  all  that  we  get  in  production  is  the  reault  of 
two,  and  only  two,  elementary  productive  powers — Nature  and 

Labour.  This  is  one  of  the  most  certain  ideas  in  the  theory 
of  production.  Man  finds  ready  to  hand  an  abundance  of 
natural  processes,  and  allies  his  own  powers  with  them.  MTiat 
nature  by  herself  does,  and  what  man  does  along  with  her — 
these  form  the  double  source  from  which  all  our  goods  come, 
and  the  only  source  from  which  they  can  come.  There  is  no 
place  for  any  third  primary  source.  ^ 

These  two  elements,  then,  jechnically  do  everything  in  the 


80 


CAPITALIST  PRODUCTION 


BOOK  II 


work  of  production.  But,  economically,  a further  and  very 
suggestive  limitation  must  be  drawn.  Of  the  vast  natural 
endowment  which  serves  as  foundation  for  man’s  productive 
combinations,  one  portion  particularly  claims  the  interest  of 
economics,  and  that  is,  those  useful  things  offered  by  nature 
only  in  limited  amount.  In  nature,  indeed,  there  is  no  lack 
either  of  materials  or  powers ; carbon  and  nitrogen,  oxygen 
and  hydrogen — generally  speaking,  most  of  the  “elements” — are 
per  se  not  more  scarce  than  are  electrical,  magnetic,  chemical, 
and  gravitation  forces.  But  certain  spontaneous  combina- 
tions of  these  elements  that  are  peculiarly  well  adapted  to 
human  want  may  be,  relatively,  scarce ; such,  for  example,  as 
useful  plants  and  minerals,  water  for  driving  power,  fertile 
land,  etc.  These  limited  gifts  and  energies  of  the  natural  world. 
obtain  for  us  a peculiar  economic  importance.  It  would  be 
foob'.sh  not  to  economise  them.  Technical  elements  of  produc- 
tion which  we  may  have  in  any  quantity,  like  atmospheric  air 
or  water  or  sunlight,  we  may  employ  or  waste  as  we  please 
without  suffering  loss  in  our  productive  returns.  But  the 
limited  technical  elements  must  be  treated  with  consideration, 
must  be  saved,  must  be  fully  utilised.  In  a word,  within  the 
technical  natural  endowment,  as  a wider  circle,  they  form  the 

specifically  economic  natural  endowment  of  man.  Since  aU,  or 
at  least  almost  all,  limited  gifts  and  energies  of  nature  are  con- 
nected with  land,  we  may,  without  much  danger,  take  Land. 
with  its  activities  or  uses,  as  the  representative  of  this  economic 
natural  endowment.^ 

To  the  uses  of  land  the  exertions  of  labeur  form  the 
counterpart.  Labour  has  ahnost  entirely  an  economical  char- 
acter. This  is  due  partly  to  the  fact  that  physical  strength  is 
given  us  in  such  scanty  measure,  as  compared  with  the  very 
extensive  claims  put  forward  by  human  needs,  that  even  the 
most  assiduous  exertions  of  labour  power  cannot  fully  satisfy 
our  desire  for  goods,  not  to  sj^eak  of  supplying  them  in  super- 
fluity ; partly  to  the  fact  that  the  exercise  of  our  powers  is 
usually  attended  by  the  painful  feeling  of  distress  and  fatigpn^ 

1 Wliere  population  is  scanty,  of  course,  it  is  possible  that  land,  or  at  least 
certain  of  the  uses  of  land,  such  as  the  growing  of  timber,  may  be  free  goods,  as 
obtainable  in  any  quantity.  But  in  modern  communities,  to  which  naturally  I 
refer  by  preference  in  this  statement,  the  uses  of  land — with  the  exception  of 
waste  land  or  desert — are  entirely  economie  goods. 


CHAP.  II 


THE  ECONOMIC  FACTORS 


81 


— at  least  when  carried  beyond  a certain  point/ — and  the 
feeling  warns  us  to  economise  our  labour. 

Nature  and  Labour  are,  then,  the  technical  elements  of 
production ; JTses  of  T.and  and  Labour  are  the  economic 
elements.  Tliese  latter  are  the  talents  which  the  producing 
man  puts  out  at  usury  with  nature,  with  her  great  fruitful  soil 
and  infinite  store  of  force.  They  are  the  enjy  powers  that 
re.ipuire  ecnnnmic,  treatment,  inasmuch  as  the  co-operation  of 
the  free  natural  powers,  which,  technically,  is  also  indispensable, 
is  given  without  question  and  without  cost.  It  is  only  the 
man  who  has  command  over  the,  requisite,  uses  of  land  and 
services  of  labour  who  receives  the  desired  economic  nroduct : 
the  man  who  has  not  these  must  do  without  the  product ; the 
man  who  owns  a double  allowance  or  a half  allowance  of  them 
will — if  the  technique  of  production  remain  the  same — receive 
double  or  half  the  product.  In  production,  therefore,  they  are 
the  only  powers  with  which  the  economic  community  has  any 
concern,  and  with  which  it  has  to  reckon.  In  short,  land  and 
labour — or,  more  accurately,  uses  of  land  and  services  of 
labour — are  the  primary  economic  productive  powers.^ 

Now  in  what  way  does  man  use  these  original  productive 
powers,?  In  answering  this  question  we  turn  back  for  a little 
into  familiar  paths. 

To  construct  goods  for  human  consumption  out  of  these 

productive  elements  man  may  take  one  of  two  ways.  He  may 
combine  the  economical  productive  powers  with  one  another, — or 
with  activities  of  free  natural  powers, — in  such  a way  that  the 
desired  good  immediately  emerges  as  result  nf  thp  romhinatinn  ; 


^ On  the  common  experience  that  “a3  labour  is  prolonged  the  effort  becomes. 
as  a general  rule,  more  and  more  T)aiDfnl,”  see  Jevons,  Theory  of  Political 
Economy,  second  edition,  p.  185  ; and  Gossen,  EntwicMung  der  Gesetze  des  mensch- 
lichen  Verkehrs,  1854. 

^ This  is  the  state  of  the.  case,  as  I believe,  expressed  with  perfect  clearness 
in  the  facts,  and  this  i.s  what  Rodbertus  profoundly  misunderstood  when  bn 
maintained,  and  repeated  with  emphasis,  that  labour  is  the  sole  original  power. 

with  which  human  economy  has  anything  to  do.  and  drew  from  that  the  conclu- 

sion that  all  goods,  economically,  are  to  be  conceived  of  as  products  of  labour 
alone  {Zur  Erkemvlniss  unserer  stoats,  Zvstdnde,  theorem  i. ; Zur  Erkldrung, 
second  edition,  p.  160  ; Zur  Beleuchtung,  p.  69).  If  to-day  we  allow  a fruitful 
field  to  lie  fallow,  or  a mine  or  water  power  to  remain  unexploited if,  in  short, 
we  do  not  act  economically  -with  valuable  uses  of  land,  we  act  as  directly  against 

cur  economic  wellbeing  as  when  we  throw  away  labour  uneconomicallv,. 


G 


82 


CAPITALIST  PRODUCTION 


BOOK.  II 


as  when  he  gathers  shellfish  on  the  shore.  Or  he  may  take  a. 
roiindahout  way,  and,  with  the  element  at  his  command,  mar 

make,  first,  another  good,  and  then,  with  its  assistance,  the 
good  he  wishes ; as,  for  instance,  when  he  makes  a boat  and 
net  and  takes  to  fishing  systematically.  We  already  know 
that  the  former  method  is  identical  with  what  the  Germans 
call  Tcapitallos  production,  the  latter  with  capitalist  production ; 
and  that  the  intermediate  products,  which  come  into  existence 
in  the  course  of  the  indirect  methods,  represent  economic 
social  capital. 

The  adoption  of  capitalist  methods  of  production  is  followed 

by  two  consequences,  erpially  cha,racteristic  and  significant. 

One  is  an  advantage,  the  other  a disadvantage.  The  advan- 
tage we  have  already  looked  at ; it  consists  in  the  greater 
Jechnical  productiveness  of  those  methods.  With  an  equal 
expenditure  of  p'rimary  productive  powers  ^ (that  is  to  say, 
labour  and  valuable  natural  powers)  more  or  better  goods  can 
be  produced  by  a wisely  chosen  capitalist  process  than  could 
be  by  direct  unassisted  production.  This  proposition,  which 
is  quite  convincingly  accredited  by  daily  experience,  we  illus- 
trated and  tried  to  explain  in  the  second  chapter  of  Book  I. 
by  a number  of  examples.  We  found  the  explanation  to 
be  that,  when  roundabout  methods  are  skilfully  chosen,  new 
allies  are  obtained  from  the  immense  stores  of  natural  powers, 
and  their  activity  is  enlisted  in  the_JWQrk  jrf-^roduetion.  It  is 
this  well-known  fact  that  is  usually  indicated  by  the  term 
“ productivity  of  capital.”  This  name,  however,  imports  into 
the  facts  a particular  interpretation,  the  correctness  of  which 
has  yet  to  be  examined  in  the  next  chapter. 
j The  disadvp.nta.gp.  coimpp.tp.rl  with  the,  ca.pita.b'st  Tnethod  of 
•production  is  its  sacrifice  of  time,  The  roundabout  ways  of 
capital  are  fruitful  but  long ; they  procure  us  more  or  better 
consumption  goods,  but  only  at  a later  period  of  time.  This 
proposition,  no  less  than  the  former,  is  one  of  the  ground 
pillars  of  the  theory  of  capital.  We  shall  see  later  on  that 
the  very  function  of  capital.,  as  a means  of  appropriatiorL-oc,. 
source  of  interest,  to  a great  extent  rests  upon  it. . I must, 

1 “ Primary  productive  powers”  is  the  move  corrset  expression,  which  we 

mn.st  BOW  p.mpiny  instead  of  ths  partial  exprfl.‘^sinn  “ ia'hniir-”  used  by  me  in  the 
second  chapter  of  Book  I.  in  order  to  avoid  tedious  explanations. 


CHAP.  11 


THE  SACRIFICE  OF  TIME 


83 


therefore,  s^uard  it  against  any-  iiiisnndprstanrlitig  by  the  .hwa 
following  remarks. 

In  the  first  place,  it  maY  very  well  happen.in  an  exceptional 
case,  that  an  indirect  method  of  production  is  not  only  better 

bnt  speedier.  A man  wishing  to  gather  apples  from  a high 
tree  will  evidently  attain  his  purpose  sooner  by  first  cutting  a 
stick  from  another  tree,  and  nsmg  it  to  knock  dov/n  the  apples, 
than  by  climbing  the  tree  and  trying  to  break  off  the  apples 
one  by  one  with  his  hand.  But  this  is  not  the  rule.  In  the 
overwhelming  majority  of  cases  we  must  tread  the  roundabout 
ways  of  capitalist  production  under  technical  conditions  of  such 
a nature  that  we  have  to  wait,  and  often  for  a very  long  time, 
before  we  get  the  ripe  final  product.  Instead  of  giving  examples 
which  must  occur  of  themselves  to  every  reader,  I would  rather 
draw  attention  to  the  fact  that,  in  the  loss  of  time  which  is,  as  a 
rule,  bound  up  with  the  capitalist  process,  lies  the  sole  gimmtLaf 

that  much-talked-of  and  much-deplored  dependence  of  labourer  on 
capitahst.  If  capitalist  production  led  as  quickly  from  the  hand 
to  the  mouth  as  unskilled  direct  production  does,  there  would 
be  nothing  to  hinder  the  workers  carrying  on  sucli  roundabout 
methods  from  beginning  to  end  on  their  own  account.  They 
would  still  be  dependent  on  the  landowners,  who  could  prevent 
them  from  access  to  the  land  which  at  the  outset  they  require, 
bnt  they  would  not  be  dependeot  on  the  capitahsts.  It  is  only 
because  the  labourers  cannot  wait  tih  the  roundabout  process — 
which  begins  with  the  obtaining  of  raw  materials  and  making 
of  tools — delivers  up  its  products  ready  for  consumption,  that, 
they  become  economically  dp.pp.ndpnt  on  thp.  rapitalists  who 
already  hold  in  their  possession  what  we  have  called  “ inter- 
mediate products.”  ^ 

^ It  is  very  characteristic  that  Eodbertus,  when  describing  the  economical 
effects  of  adopting  roundabout  ways  of  production,  chooses  his  illustration  pst 
out-of  that  minority  of  cases  where  the  roundabout  wav  is  the  quicker  {Das 
Kapital,  p.  236).  The  consequence  is  that,  on  this  and  other  occasions,  he  leaves 
in  the  shade  all  the  economical  elements  which  form  the  basis  of  the  phenomenon 
of  interest — and  of  these  the  most  notable  is  the  loss  of  time  connected  with 
the  canying  through  of  productive  methods — and,  taking  a very  one-sided  view, 
lays  the  origin  of  rent  at  the  door  of  the  existing  circumstances  of  private  right 
(e.g.  p.  310).  But  private  rights  in  capital  would  not,  by  themselves,  do  any 
harm  to  the  labourers,  and  it  would  be  very  easy  for  them  to  avoid  the  toll-bars 
which  the  capitalists  have  erected,  if  the  fatal  lapse  of  time  between  beginning 
and  end  of  the  lengthy  capitalist  process  did  not  make  it  impossible  for  labourers 
to  adopt  similar  processes  on  their  own  account. 


84 


CAPITALIST  PRODUCTION 


BOOK  II 


Again — though  this  scarcely  needs  pointing  out — when  we 
speak  of  capitalist  production  taking  time,  it  is  not  relevant  to 
raise  the  objection  that,  with  a piece  o_f „ 
viade,  say  a tool,  a definite 
than  it  could  be  without  the  assistance  of  capital ; that,  for 
instance,  a tailor  takes  three  days  to  sew  a coat  by  hand,  and 
one  day  to  do  it  with  a sewing-machine.  For  it  is  clear  that 
the  machine  sewing  forms  only  one  part,  and  indeed  the 
smaller  part,  of  the  capitalist  process ; the  principal  part  falls 
to  the  making  of  the  sewing-machine,  and  the  total  process 
lasts  considerably  longer  than  three  days. 

Thus  far  we  have  considered  capitalist  production  as  an 
undivided  whole,  and  have  contrasted  it  with  production 
carried  on  entirely  without  capital  But  here  we  are  reminded 
of  a fact  that  has  to  be  reckoned  with,  viz.  that  in  capitalist 
production  th^rp.  arp  stages  and  degrees ; to  speak  accurately, 
there  are  innumerable  degrees  of  “ Capitalism.”  In  the 
making  of  a consumption  good  the  possible  roundabout  methods 
are  of  very  varying  length.  We  may  make  intermediate 
products  from  which  the  final  good  will  be  obtained  in  a 
month,  or  a year,  or  ten  years,  or  a hundred  years.  The 
question  now  is.  what  influence  such  differences  of  degree  havft 

on  product. 

On  the  whole  it  may  be  said  that  not  only  are  the  first 
steps  more  productive,  but  that  every  lengthening  of  the 
roundabout  process  is  accompanied  by  a further  increase  in 
the  technical  result ; as  the  process,  however,  is  lengthened 
the  amount  of  product,  as  a rule,  increases  in  a smaller 
proportion. 

This  proposition  also  is  based  on  experience.-and  only_Qii 
experience.  What  it  says  must  be  simply  taken  as  a fact  of 
the  technique  of  production.  The  reader,  moreover,  will  easily 
be  able  to  check  its  accuracy  if  he  follows  in  thought  the  steps 
which  lead  to  the  production  of  any  consumption  good.  For 
instance,  firewood  can  be  got  quite  directly  so  long  as  we  limit 
ourselves  to  the  gathering  of  dry  branches  or  breaking  off  of 
weak  twigs.  We  take  a short  roundabout  path  in  making 
and  using  a stone  axe.  A longer  process  involves  digging  ore 
out  of  the  ground,  getting  the  fuel  and  necessary  tools,  and 
smelting  iron  out  of  the  ore,  working  up  the  iron  into  steel. 


CHAP.  II 


INCREASE  OF  PRODUCT 


85 


and  finally  turning  out  a finished  steel  axe.  Beginning 
farther  back,  we  may  construct  cunning  machinery  for  mining 
and  raising  the  ore,  elaborate  blast  furnaces  for  smelting  it, 
special  machines  for  making  and  sharpening  the  axe.  Going 
farther  back  still,  we  may  put  up  engineering  shops  and 
machinery  for  constructing  each  kind  of  appliance,  and  so  on. 
It  will  scarcely  be  doubted  that  every  additional  step  increases 

the  productiveness  of  the  total  process ; that  is,  results  in 
the  obtainmg  of  the  unit,  say  the  cubic  foot  of  wood,  at  a 
smaller  total  expenditure  of  labour  (mediate  and  immediate). 
But  just  as  little  will  it  be  doubted  that  the  first  two  pro- 
ductive methods,  the  use  of  the  stone  axe  and  then  of  the 
steel  axe,  must  have  caused  a much  greater  revolution  in  the 
productiveness  of  woodcutting  than  the  later  improvements, 
although,  absolutely,  these  may  be  by  no  means  inconsiderable. 

If  necessary,  this  may  easily  be  proved  to  demonstra- 
tion by  a little  calculation.  Assume,  for  example,  that 
a labourer  working  with  his  hands  can  cut  in  one  day  2 
cubic  feet  of  wood,  and  working  with  a stone  axe,  which 
has  taken  three  days  to  make,  can  cut  1 0 cubic  feet : the 
three  days’  capitalist  process  is  rewarded  by  a surplus  return 
of  8 cubic  feet  per  labour  day.  Now  possibly  the  doubling  of 
the  process — say  that  the  more  careful  fashioning  of  the  stone 
axe  takes  six  days — may  also  double  the  surplus  return,  and 
give  16  cubic  feet.  But  it  is  scarcely  likely  that  trebling  the 
roundabout  process  can  treble  the  surplus  return.  And  it  is 
quite  certain  that  extending  the  roundabout  process  a thou- 

sandfold— say  by  sinking  of  pits,  from  which  the  ore  for  the 
axe  may  be  got  after  years  have  elapsed — will  not  be  able  tg 
increase  the  surplus  return  a thousandfold-  Otherwise  we 
should  have  the  all  but  inconceivable  possibility  that  a worker 
in  one  day  could  cut  8000  feet  of  wood!  From  some  one 
point — probably  a point  not  far  off^ — the  sirrplus,  though  still 
increasing,  will  increase  in  a less  ratio  than  the  production 
period. 

Of  course  in  such  cases  no  definite  figure  can  be  named, 
either  for  the  point  from  which  the  productiveness  of  further 
extensions  of  the  process  begins  to  decrease,  or,  speaking 
generally,  for  the  amount  of  surplus  result  connected  with  any 
definite  length  of  process.  These  data  vary  according  to  the 


86 


CAPITALIST  PRODUCTION 


BOOK  II 


technical  circumstances  of  each  branch  of  production,  and  at 
each  stage  of  productive  skill.  Every  new  invention  alters. 
thenL.  The  discovery  of  gunpowder,  for  example,  opened  up 
at  a flash  the  possibility,  which  did  not  exist  the  moment  before, 
of  increasing  the  productiveness  of  the  chase  by  perhaps  one 
half,  and  the  productiveness  of  stone-quarrying  by  perhaps  a 
hundredfold.^  We  may,  however,  with  sufficient  confidence 
repeat  the  proposition  already  formulated,  that  every  exten- 
sion of  the  -production  process  (so  far  as  it  is  wisely  chosen, 
of  course)  leads,  generaUy  speaking,  to  some  surplus  result. 
It  may  be  confidently  maintained  that  there  is  not  one 
branch  of  production  the  returns  of  which  may  not  be 
considerably  increased  in  this  way,  as  against  the  method  of 
production  prevailing  at  the  time ; and  that  without  any  new 
invention,  but  simply  by  the  intercalation  of  intermediate 
members  long  familiar  to  capitalist  production, — whether  it  be 
by  the  adoption  of  a steam  motor,  or  an  apt  transmitter,  or 
some  ingenious  gearing,  blast,  lever,  regulator,  or  the  like. 
How  far  behind,  indeed,  in  capitalist  equipment  are  the  tnost 

of  our  agricultural  and  industrial  businesses  compared  with 

the  most  advanced  typical  businesses ! And  certainly  these 
latter  are  no  less  far  behind  an  ideally  perfect  equipment.^ 

The  fact  that  the  prolongation  of  production  processes 
leads  to  surplus  results,  and  the  fact  that  these  surplus  results 

' Inventions,  so-called,  generally  mean  the  rlisnoverv  of  a new  and  moiR 

productive  method  of  production.  Frequently — probably  in  most  cases — the 
new  way  is  longer  than  the  old,  and  in  this  case  to  utilise  the  invention  requires 
the  making  of  a great  number  of  intermediate  products,  or,  as  it  is  usually 
expressed,  a large  investment  of  capital : e.g.  in  machinery,  building  of  railways, 
and  the  like.  But  often  a happy  invention  may  lead  to  a better,  and  at  the 
same  time  shorter,  way  of  production,  such  as  the  manufacture  of  certain  dye- 
stuffs from  chemical  instead  of  plant  bodies.  ' However  elaborate  the  former 
may  be,  it  is  stUl  certainly  far  more  direct  and  speedy  than  a manufacture  which 
has  to  wait  on  tedious  processes  of  growth. 

^ It  may  be  asked  here,  by  way  of  objection,  why  man  does  not  fully  utilii^ 
the  chances  offered  him  of  increasing  the  technical  result  bv  the  tcclmical  know- 
ledge heJhas  at  the  tnoment.  The  common  explanation  runs — from  want  0/ 
capital  With  the  limited  amount  of  capital  at  his  disposal  man  can  only  utilise 
those  chances  of  employment,  among  the  infinite  number  of  remunerative  ones, 
wliich  are  most  remunerative,  and  a great  number  of  less,  but  still  remunerative, 
employments  must  be  passed  over.  This  explanation  is  not  quite  exact,  but 
it  is  at  least  right  in  the  main  contention.  We  may  therefore  be  content 
with  it  until,  in  another  connection,  we  can  examine  the  matter  with  perfect 
accuracy. 


CHAP.  II 


THUNEN'S  LA  IV 


87 


usually  decrease  from  a certain  point  or)wa.rd.a,  have  long 
Lftp.n  iiotipprl  anH  .q.pl-nnwIp.Hgp.rl  in  our  science ; mostly,  I must 
say,  in  another  form,  and  one  borrowed  from  the  jargon  of  the 
Productivity  Theory.  It  is  many  years  smce  Thiinen  put 
them  in  the  most  impartial  manner,  and  showed  that,  in 
the  case  of  progressive  increase  of  capital,  the  capital  that 
comes  last  does  lead  to  an  increase  in  the  product  of  labour. 

but  in  a constantly  decreasing  proportion.^  On  this  founda- 
tion of  fact  he  himself  framed  the  well-known  doctrine  that 
the  rate  of  interest  adjusts  itself  to  the  productiveness  of  the 

last  dose  of  capital  applied  in  the  least  productive  employment. 

and,  in  the  wake  of  this  doctrine,  the  facts  were  recognised  and 
received  in  the  widest  circles.^  In  harmony,  however,  - with 
the  fashion  of  the  time,  these  facts  were  forced  into  the  special 
forms  of  presentation  and  terminology  of  the  Pioductivity 
Theor}^,  whereby  the  most  vexatious  mistakes  and  confusions 
shpped  in  along  with  them.®  Lefore  going  further  it  seemed  to 
me  advisable  here  to  try  to  restate  the  facts  in  their  naked 
simplicity. 

It  scarcely,  perhaps,  requires  to  be  proved  that  the  capital- 
ist production  of  consmnption  goods,  although  carried  out  in 
roundabout  ways  and  by  many  stages,  does  not,  on  that 
account,  cease  to  exhibit  an  intimately  connected  and  imitpr) 
work  of  production.  The  laliopr  which  produces  the  mter- 
mediate  products — -the  mediate  laboig-.  as  we  shall  call  it  with 
Eodbertus  ^ — ^ajid  the  labour  which,  out  of  and  with  the  inter- 
mediate products,  produces  the  desired  good — the  immerbate 
labour — both  form-  a part  of  the  production  of  the  consumution 
good.  The  production  of  timber  is  more  than  the  labour  of 

1 Der  isolirte  Stoat,  third  edition,  part  ii.  div.  i.  p.  97.  See  particularly 
the  table  on  p.  101. 

* For  instance  by  Soscher,  Grundlagen,  § 183 ; by  Mangoldt,  VolJcswirth- 
schaftslehre,  1868,  p.  432  ; by  Mithoff  in  Schonberg’s  Handhich,  second  edition, 
p.  663,  and  by  many  others.  Jevons  independently  adopted  quite  similar  views. 
Theory  of  Political  Economy,  second  edition,  p.  277. 

® In  particular  the  “physical”  or  “technical  productivity^.”  which  is  founded 
on  these  facts  (that  is,  the  circumstance  that  by  the  assistance  of  capital  more 
products  can  be  produced  than  without  it),  was  confused  with  a “value  pro- 
ductivity ” (that  is,  a pretended  power  of  capital  to  produce  more  value  than  it 
itself  posses.ses).  See  my  CapiUd  and  Interm,  pp.  112,  131. 

* Bos  Kapital,  p.  236. 


88 


CAPITALIST  PRODUCTION 


BOOK  II 


felling  wood  in  the  forest ; it  embraces  the  labour  of  the  smith 
who  makes  the  axe,  of  the  carpenter  who  cuts  the  haft,  of  the 
miner  who  raises  the  ore,  of  the  iron  workers  and  steel  workers 
who  prepare  it,  and  so  on.  True,  our  modern  divisinn  of 
employment  to  outward  appearance  breaks  up  the  unity  of  the 
process  into  a number  of  independent  parts,  but  it  is  the 
theorist’s  business  to  understand  economic  processes  in  their 
living  connection,  and  he  dare  not,  of  course,  let  himself  be 
deceived  by  appearances,  but  must  reproduce  in  his  own  mind 
the  real  unity  of  the  work  of  production  thus  obscured.  The 
masterly  manner  in  which  Eodbertus  has  done  this  is  one  of 
his  best  services  to  economics. 

But  this  very  consideration,  essentially  economic  as  it 
is,  raises  a doubt  we  must  fairly  meet.  According  to  what 
has  been  said,  the  production  period  of  a consumption  good 
is,  strictly  speaking,  to  he  reckoned  from  thp.  moment  nn 

whip.h  ttip  firgf-,  banri  wqp  laid  to  the  making  of  its  first  inter- 
mediate right  down  to  the  completion  of  the  good 

itselh  In  our  times,  when  unassisted  production  has  almost 
entirely  disappeared,  and  one  generation  builds  on  the  inter- 
mediate products  laid  down  by  earlier  generations,  the  produc- 
tion period  of  almost  any  consumption  good  could,  in  any  strict 
calculation,  trace  its  beginning  back  to  early  centuries. 

The  boy  who  cuts  a stick  with  his  knife  is,  strictly  speak- 
ing, only  continuing  the  work  of  the  miner  who,  centuries  ago, 
thrust  the  first  spade  into  the  ground  to  sink  the  shaft  from 
which  the  ore  was  brought  to  make  the  blade.  Of  course  the 
finished  product  of  to-day  owes  a quite  infinitesimal  fraction — 
not  worth  calculation  even  if  that  were  possible — to  the  firstlings 
of  labour  in  these  far-off  centuries,  and  it  would  therefore  give 
a,  very  false  view  of  the  degree  of  capitalism  expended  in  the 
eiitting  pt  tbp  if  wp  were  to  estimate  it  hv  the  absolute 

period  of  time  intervening  between  the  atom  of  labour  first  put 
forth  and  the  completion  of  the  work. 

It  is  more  important  and  more  correct  to  look  at  the 
period  of  time  which  elapses  on  the^eraqe  between  the 
expenditure  of  the  original  productive  powers,  labour  and 
uses  of  land,  as  successively  emp  oyed  in  any  work,  and  the 
turning  out  of  the  finished  consumption  goods.  Brnriiip.tion  i.s  ^ 
more  or  less  capitalistic  according  to  the  average  remoteness  o£^ 


CHAP.  11 


THE  AVERAGE  PERIOD 


89 


the  period  at  which  the  original  productive  powers  exerted 

diu'ing  the  process  are  paid.  Say,  for  example,  that  the  pro- 
duction of  a commodity  costs  in  all  a .hundred  days  of  labour 
— for  the  sake  of  simplification  we  shall  leave  out  the  co-oper- 
ating uses  of  land — and  that,  of  these  hundred,  one  day  was 
expended  ten  years  before  the  completion  of  the  work,  another 
nine  years,  others  respectively  eight,  seven,  six,  five,  four,  three, 
two,  and  one  year,  while  the  remaining  ninety  days  were 
expended  immediately  before  the  completion.  Then  the  first 
day  of  labour  is  paid  ten  years  later,  the  second  nine  years 
later,  the  third  eight  years  later,  and  so  on,  while  the  last 
ninety  days  are  paid  immediately.  The  calculation  is  as 
follows : — 

10  + 9 + 8 + 74-6  + 5 + 44-3  + 2+1  55 

loo  ^ lOO' 

That  is  to  say,  on  the  average  the  hundred  da, vs  of  labour  a.ra 
paid  in  about  half  a vea.r.  Say  that  the  prodiiction  of  another 
good  were  also  to  demand  in  all  a hundred  days  of  labour, 
likewise  spent  in  the  course  of  a tEn  years’  period,  but  spread 
over  it  in  such  a way  that  twenty  days’  work  was  expended 
ten  years  before,  other  twenty  days’  work  nine  years  before, 
five  days’  work  in  each  year  from  the  eighth  to  the  first 
successively,  wliile  the  last  twenty  days  were  spent  immediately 
before  the  completion  of  the  work,  the  average  would  cnme  out 
quite  differently  and  much  higher : — 

200  + 180  + 40  + 35  + 30  + 25  + 20  + 15  + 10  + 5 560 

100  ~100’ 

or  more  than  five  and  a half  year_s^  It  is  highly  probable, 
moreover,  that  in  both  cases  some  fraction  of  a day’s  work  will 
have  been  spent  centuries  before,  but  such  a small  element 
will  scarcely  influence  the  average,  and  may  in  most  cases  be 
simply  neglected.^ 

1 The  first  of  the  above  schemes  corresponds  to  the  case  of  a production 
where  one  single  tool  is  employed,  and  where  the  total  process  extends  over  ten 
years — for  instance,  the  making  and  using  of  an  axe  of  Bessemer  steel.  The 
second  scheme,  again,  corresponds  to  a production  where,  besides  the  axe,  a 
number  of  other  capitalistic  tools,  auxiliary  mechanism,  and  materials,  are 
employed,  the  existence  of  which,  however,  does  not  date  from  farther  back  than 
ten  years.  This  compari.son  clearly  shows  how,  without  incieasing  the  absolute 
length  of  the  nroduction  period,  the  degree  of  capitalism  may  be  very  considerably. 


90 


CAPITALIST  PRODUCTION 


BCOK  11 


Where  I have  spoken  above  of  extension  or  prolongation 
of  the  roundabout  process  of  production,  and  of  degrees  of 
capitalism,  I must  be  understood  in  the  sense  just  explained. 

;^The  length  or  the  shortness  of  the  process,  its  extension  or  its. 
curtailment,  is  not  to  be  measured  by  the  absolute  duration  of 

tJip.  period  that  lies  between  the  expenditure  of  the  first  atom 
of  labour  and  the  last — otherwise  the  cracking  of  nuts  with  a 
liammer  which  might  chance  to  be  made  of  iron  brought  from 
a mine  opened  by  the  Eomans  would  perhaps  be  the  most 
“ capitalistic  ” kind  of  production.  Nor  is  it  to  be  measured 

the  number  of  independent  intermediate  members  which 
the  production  process  embraces — otherwise  when,  by  means 
of  the  three  intermediate  products,  twig,  hme,  and  bird-lime, 
a boy  catches  birds  on  the  same  day  as  he  commences  making 
these  three  forms  of  capital,  his  bird-catching  would  be  more 
capitalistic  than  the  far-back  labour  of  the  miner  who  devotes 
years  to  the  sinking  of  a shaft.  KBut  it  is  to  be  measured  bv 
the  average  period  which  lies  between  the  successive  expendi- 
ture in  labour  and  uses  of  land  and  the  obtaining  of  the  final 
good.  It  is  only  in  methods'  of  production  where  the  expendi- 
ture in  original  powers  is  distributed  equally  over  the  whole 
production  period  that  the  absolute  length  of  the  process 
affords  at  the  same  time  the  proper  measure  for  the  degree  of 
capitalism.^ 

Let  us  now  apply  what  has  been  said  of  siugle  acts  of  pro- 

duction to  the  circumstances  of  an  entire  commmiity.  Every 
year  a community  comes  anew  into  possession,  and  gets  the 
disposal  of  a certain  quantum  of  original  productive  powers, 
the  powers  represented  by  its  labour  and  land.  The  farther 
away  its  production  is  from  capitalist  production — there  is  no 
production,  of  course,  absolutely  without  capital — the  greater 

increased  ; all  that  is  necessary  is  to  alter  the  proportion  between  the  number 
of  early  workers  and  that  of  the  finishing  ones.  Whether  it  is  ten  workers 
employed  in  the  final  stage  against  one  worker  employed  ten  years  before,  or  one 
worker  in  the  final  stage  against  ten  workers  ten  years  before,  in  either  case  the, 
total  production  process  extends  over  a period  of  ten  years.  But  in  tlie  former 
case  the  finishing  workers  would  be  very  sparingly  provided  with  tools,  machines, 
etc.  ; in  the  latter  case  they  would  be  very  amply  provided.  The  latter. -o.C 
^ourse,  would  be  far  and  away  the  more  capitalistic  of  the  two, 

1 See  the  interesting  calculation  and  graphic  statement  of  the  amount  of 
investment  of  capital  in  Jevons’s  Theory  of  PoUtical  Economy,  second  edition, 
p.  249. 


CHAP.  II 


SUMMARY 


91 


will  be  the  -proporiinTi  nf  t.hp  ypar’s  prnfliip.tive  powers  that  is 
changed  into  consumption  goods  during  the  same  year.  The 
more  capitalistic  the  production  is,  the  smaller  will  be  the 
proportion  of  the  year’s  productive  powers  consumed  within 
the  year,  and  the  greater  the  proportion  invested  in  inter- 
mediate products  that  will  come  to  maturity  as  finished  goods 
only  in  future  years,  ^nd  again,  the  higher  the  degree  of 
capitalism  is.  the  more  remote  will  he  thp.  pprind  at.  wliirh 
these  intermediate  products  mature.  Thus  a community  pro- 
ducing from  hand  to  mouth  consumes  in  each  year  the  fruits 
of  the  productive  powers  of  that  same  year.  A capitalist 
community  consumes  only  to  a small  extent  the  fruits  of 
productive  powers  of  the  present  year,  and  to  a great  extent 
the  fruits  of  the  productive  powers  of  past  years,  while  it 
again  is  making  intermediate  products  for  the  service  of 
future  years.  And  the  higher  the  degree  of  capitalism,  the 
foiiher — hack  in  the  past,  on  the  average,  are  the  years 
whose  productive  powp.r.ci  it,  c.nn.cimnes^  and  the  farther  on  in 
the  future  are  the  periods  for  which  it  provides 

And  now,  I trust,  the  following  proposition,  which  puts 
together  the  chief  features  of  the  capitalist  production  process, 
will  be  understood  beyond  possibility  of  mistake. 

All  consumption  goods  which  man  produces  come  into  j 
existence  through  a co-operation  of  human  power  with  natural  (, 
powers,  which  latter  are  partly  economic,  partly  free.  ^ 
means  of  these  primary  productive  powers  man  may  make  the  - 
consumption  goods  he  desirps,  piT.hp.r  inimpdiately,  or  through. 
the  medium  of  intermediate  products  called  Capital.^  The  latter 
method  demands  a sacrifice  of  time,  but  it  has  an  advantage  in  s 
the  quantity  of  product,  and  this  advantage,  although  perhaps  ' 
in  decreasing  ratio,  is  associated  with  every  prolongation  of  the 
roundabout  way  of  production. 


CHAPTEE  III 


THE  FUNCTION  OF  CAPITAL  IN  PRODUCTION 

After  what  has  been  said  in  the  preceding  chapter  it  should 
not  be  difficult  accurately  to  indicate  the  role  which  capital 
plays  in  economic  production. 

Capital  has,  first,  a symptomatic  importance.  Its  presence 
is  always  the  symptom  of  a profitable  roundabout  production. 
I say,  deliberately,  “symptom”  and  not  “ cause  ” or  “ condition  ” 
of  profitable  methods  of  production ; for,  as  a fact,  its  presence 
is  rather  the  result  than  the  cause.  If  men  to-day  are  fishing 
with  boats  and  nets  instead  of  picking  the  fish  out  of  pools  on 
the  shore  with  their  hands,  it  cannot  be  said  that  they  have 
adopted  those  more  fruitful  methods  because  they  possess  boats 
and  nets.  Obviously  they  possess  boatamnd  nets  because  they 
have  adopted  these  methods.  They  must  have  already  chosen 
the  roundabout  way  of  production  before  these  goods,  speaking 
generally,  come  into  existence.’^ 

This,  however,  does  not  exhaust  the  importance  of  capital. 
At  is.  secondly. — and  herein  lies  the  chief  point  of  its  productive 
efficiency, — an  effective  intermediate  cause  of  the  consummation 
of  this  profitable  roundabout,  process.  ^ Every  piece  of  capital 
is,  to  a certain  'extent,  a store  of  useful  natural  powers,  the 
working  of  which  helps  to  bring  to  a successful  issue  the 
roundabout  process  in  the  course  of  which  the  piece  of  capital 
has  come  into  existence.  I say  “ intermediate  cause,”  not 

^ It  would  be  somewhat  different  if  we  were  to  adopt  the  other  conception  of 
capital,  and  understand  by  it,  not  intermediate  products  only,  but  the  entire 
national  siibsistence  fund,  which  would  therefore  include  the  labourers’  subsist- 
ence. In  that  case,  but  only  in  that  case,  nna  tnip'ht  sav  that,  rapiffll  wns 
cause  of  these  profitable  roundabout  ways  of  production  being  adopted. 


CHAP,  ni 


AS  TOOL  AND  CA  USE 


93 


“ cause.”  Capital  gives  no  independent  impulse ; it_  only 
transmits  an  impul.se  given  hy  the  nrigiual  productive  powers. 
just  as  one  billiard  baU.  transmits  motion  to  another.  The 
function  of  capital,  indeed,  has  been  called  the  “ prianninp-  of 
natural  powers.”  The  expression  is  quite  appropriate,  and 
very  happy.  Only  it  must  never  be  forgotten  that  this 
attribute  belongs  to  the  entire  capitahst  process,  not  only  to 
the  “descending  branch,”  generally  called  the  use  of  the  capital, 
but  also  to  the  “ascending  branch,”  in  which  the  capital  itself  is 
first  made.  Man  does  not  first  prison  natural  powers  by 
means  of  capitol : capital  itself  originates  as  the_result— of-a 
previous  imprisonment — by  the  original  productive  powers 
that  are  at  man’s  own  bidding — of  certain  comphant  natural 
powers.  Taken  all  in  all,  among  the  many  predicates  which 
economists  have  given  to  capital,  the  one  that  best  fits  this 
aspect  of  the  case  is  that  of  “ Tool  of  Production.” 

But,  thirdly,  capital  is  also  the  indirect  cause  of  other 

profitahlft  rnn  rid  about  ways  of  production  being  entered  oa — 
other,  that  is,  than  those  in  the  course  of  which  it  itself  has 
come  into  existence.  When  a people  possesses  much  capital 
not  only  can  it  successfully  complete  those  processes  in  the 
course  of  which  the  capital  presently  existing  has  come  into 
beiug,  but  it  can  also  adopt  other  and  new  methods.  For  the 
stock  of  capital  in  hand  (which,  essentially,  is  nothing  else 
than  an  aggregate  of  consumption  goods  in  a transition  state 
throws  off  every  year  a certain  quantity  of  its  constituents, 
which  have  just  completed  their  transition  state  and  becoma 
finished  good^  and  places  them  at  the  disposal  of  the  current 
economic  period  for  purposes  of  immediate  consumption.  In 
this  way  the  greater  the  stock  of  capital,  the  larger  is  the 
share  taken  bv  the  productive  powers  of  the  past  in  providing- 

means  of  consumption  for  the  present,  and  the  less  are  the 
new  productive  powers  of  the  present  drawn  on  for  the  present. 
Thus  a larger  proportion  of  these  current  powers  is  free  for 
the  service  of  the  future,  that  is,  for  investment  in  more  or 
less  far-reaching  processes  of  production. 

If  a community  is  so  poor  that  the  consumption  goods 

^ Schaffle  very  finely  speaks  of  capital  a-s  “Consumption  wealth  as  it  were  in, 
the  stalk,  when  it  is  still  only  swelling  bud  and  ripening  fruit  (Schbnberg’s 
Handhijch-,  second  edition,  vol,  i.  p.  208). 


94 


FUNCTION  OF  CAPITAL  IN  PRODUCTION 


BOOK  II 


maturing  out  of  capitalist  intermediate  products  in  any  year, 
say  in  1888,  scarcely  cover  ^ of  that  year’s  wants,  then  the 
remaining  must  be  provided  out  of  the  labour  and  uses  of 
land  of  1888,  and  only  a fractional  part  of  the  productive 
powers  of  that  year  remains  over  to  initiate  methods  of  pro- 
duction that  will  turn  out  consumption  goods  in  the  years 
following.  If.  on  the  other  hand,  the  past  has  accumu- 
lated a treasure  of  intermediate  products — raw  materials, 
tools,  machines,  factories,  workshops,  etc.^ — so  great  that  their 
successive  maturing  covers  the  consumption  demand  of  the 
year  1888  to  the  extent  of  that  of  1889  to  the  extent  of 
3^^,  that  of  1890  to  the  extent  of  and  so  on,  then  only 
one  half  of  the  productive  powers  of  1888  will  _be  claimed  to 
make  up  the  current  wants,  while  the  entire  other  half  may 
be  spent  unhesitatingly  in  producing  intermediate  products 
which  will  come  to  maturity,  as  consumption  goods,  only  in  later 
years — all  the  later  in  proportion  as  the  next  year’s  wants 
are  already  covered  by  accumulations  of  capital  in  the  past. 

V In  this  sense,  but  only  in  this  sense,  is  it  correct  to  say 

that  man  must  already  have  capital  before  he  can  enter  on 
roundabout  wavs  of  production  ; that  want  of  capital  prevents 
man  taking  advantage  of  far-reaching  and  profitable  methods  of 
production,  such  as  the  laying  of  railways,  building  of  canals, 
irrigation  schemes,  altering  of  river-beds,  and  so  on.  It  would 
be  quite  incorrect  to  understand  this  proposition  as  meaning 
that  a community  must  have,  finished  and  ready  to  hand,  that 
kind  of  concrete  capital  with  which  the  methods  of  production 
in  question  are  carried  out,  or  even  the  concrete  capital  (raw 
materials,  tools,  etc.)  out  of  which  are  made  the  forms  of 
capital  first  needed.  All  that  is  required  is,  that  the  com- 
munity possess  so  much  capital,  whatever  its  shape,  as  will 
cover — while  it  is  being  gradually  changed  into  consumption 
goods — the  demand  of  the  present  and  near  future  for  such 
goods  sufficiently  to  leave  the  current  production  powers  free 
for  investment  in  intermediate  products-  of  the  kind  required. 
It  would  be  essentially  more  correct  to  sax  that_we-  require 
consurnftion  goods  before  we  can  enter  upoiLrpundabimt_ways_ 
of  production,  whether  these  be  in  the  form  of  finished  stocks 
of  goods  ready  for  consumption,  or  in  the  transition  form  of 
intermediate  products. 


CHAP,  in 


NOT  AN  INDEPENDENT  FACTOR 


95 


Lastly,  we  can  now  answer,  easily  and  categorically,  the 
much-disputed  (T[up,stinn.  whpf.hpT-  any  indepeudent  productive 
power  is  inherent  in  capital : or,  to  put  the  question  in  its 
usual  form,  whether  capital  is  a third  and  independent  “ factor 
in  production  ” alongside  of  labour  and  nature  ? 

The  answer  must  be  a most  distinci  negative.  This  seeing 
to  me  the  only  conclusion  any  one  can  come  to,  provided  he 
makes  clear  to  himself  the  sense  in  which  this  question  is  put, 
and  must  be  put  if  it  is  worth  the  trouble  of  putting  at  all. 
And  this  sense  is  a very  emphatic  one.  The  following 
analogy  will  make  it  perfectly  clear.  A man  throws  a stone 
at  another  man  and  kills  him.  Has  the  stone  killed  the 
man  ? . If  the  question  is  put  without  laying  any  special 
emphasis  it  may  be  answered  without  hesitation  in  the 
affirmative.  But  how  if  the  murderer,  on  his  trial,  were  to 
defend  himself  by  saying  that  it  was  not  he  but  the  stone  that 
had  killed  the  man  ? Taking  the  words  in  this  sense  should 
we  still  say  that  the  stone  had  killed  the  man,  and  acquit  the 
murderer  ? 

How  it  is  with  an  emphasis  like  this  that  economists 
inquire  as  to  the  independent  productivity  of  capital.  The 
question  comes  up  in  the  course  of  the  inquiry  concerning 
the  elements  which  constitute  our  material  goods.  A similar 
interest  to  that  which  the  chemist  has  in  the  analysis  of  com- 
pound bodies  leads  the  economist  to  analyse  the  multiform 
transition  stages  of  material  goods,  to  trace  them  bank. -to 
their  source,  and  to  resolve  the  thousandfold  instruments  and 
auxiliaries  of  production,  to  which,  directly  or  indirectly,  they 
owe  their  existence,  into  the  simple  fundamental  powers  from 
the  co-operation  of  which  everythiug  proceeds.  In  this  con- 
nection the  doubt  arises  whether  capital  is  an  independent 
productive  power  or  not.  The  whole  spirit  of  the  inquiry 
allows  only  one  meaning  to  be  given  to  the  question,  and  the 
emphasis  is  very  marked.  AVe  are  not  asking  about  dependent 
intermediate  causes,  but  about  ultimate  indepeudeut  elemeuts.' 
The  question  is  not  whether  capital  plays  a part  in  the  bring- 
ing about  of  a productive  result — such  as  the  stone  does  in 
the  killing  of  the  man — but  whether,  granted  the  productive 
result,  some  part  of  it  is  due  to  capital  so  entirely  and  pecu- 
liarly that  it  simply  cannot  be  put  to  the  credit  of  the  two 


96 


FUNCTION  OF  CAPITAL  IN  PRODUCTION  book  ii 


other  recognised  elementary  factors,  nature  and  labour.  Now 
can  this  question  be  answered  in  the  affirmative  ? 

Emphatically  it  can  not.  Capital  is  an  intermediate 
^product  of  nature  and  labour,  nothing  more.  Its  own  origin, 
its  existence,  its  subsequent  action,  are  nothing  but  stages  in 
the  continuous  working  of  the  true  elements,  nature  and 
labour.  They  and  they  alone  do  everything  from  beginning 
to  end  in  bringing  consumption  goods  into  existence.  The 
only  distinction  is  that  sometimes  they  do  it  all  at  once, 
sometimes  by  several  stages.  In  the  latter  case  the  completion 
of  each  stage  is  marked  outwardly  by  the  appearance  of  a 
fore-product  or  intermediate  product,  and  capital  has  emerged. 
But,  let  me  ask,  is  a thing  any  the  less  the  work  of  its  author- 

that  it  is  not  produced- -all,  at  once,  but  in  instalments?  If 
to-day,  by  allying  my  labour  with  natural  powers,  I make 
bricks  out  of  clay,  and  to-morrow,  by  allying  my  labour  with 
natural  gifts,  I obtain  lime,  and  the  day  after  that  make 
mortar  and  so  construct  a wall,  can  it  be  said  of  any  part  of 
the  wall  that  I and  the  natural  powers  have  not  made  it  ? 
Again,  before  a lengthy  piece  of  work,  such  as  the  building  of 
a house,  is  quite  finished,  it  naturally  must  be  at  one  time 
a fourth  finished,  then  a half  finished,  then  three-quarters 
finished.  What  now  would  be  said  if  one  were  to  describe 
these  inevitable  stages  of  the  work  as  independent  requisites 
of  house-building,  and  maintain  that,  for  the  building  of  a 
house,  we  require,  besides  building  materials  and  labour,  a 
quartPT--fini.cthftd  house,  a half-finished  house,  a three-quarters- 
finished  house  ? In  form  perhaps  it  is  less  striking,  but  in 
effect  it  is  not  a whit  more  correct,  to  elevate  those  inter- 
mediate steps  in  the  progress  of  the  work,  which  outwardly 
take  the  shape  of  capital,  into  an  independent  agent  of 
production  by  the  side  of  nature  and  labour. 

This  would  never  have  been  called  in  question  had  it  not 
been  that  the  introduction  of  division  of  vocations  and  labour 
had  split  up  the  united  work  of  producing  consumption  goods 

into  a number  of  apparently  independent  acts  of  production. 
It  was  this  that  made  economists  forget  to  look  at  it  as  a 
whole,  and  made  them,  with  singular  modesty,  bow  before 
the  dependent  intermediate  creations  of  previous  human 
activity  as  if  they  represented  an  independent  power.  But 


CHAP.  Ill 


NOT  AN  INDEPENDENT  FACTOR 


97 


even  as  it  was,  it  was  scarcely  possible  for  any  acute  theorist 
to  make  this  confusion  if  another  circumstance  had  not 
conspired  to  assist  it.  That  was  the  aenepted  parallelism 
between  factors  of  production  and  branches  of  income,  and 

the  awkwardness  economists  feared  to  encounter  in  the 
explanation  and  justification  of  interest  if  they  had  to 
refuse  recognition  to  capital  as  an  independent  factor  of 
production.  All  natural  income,  it  was  taught,  is  based  on 
participation  in  the  production  of  goods.  The  various  branches 
of  income  are  nothing  else  than  the  forms  in  which  the 
different  contributories  to  production  are  paid.  Kent  of  land, 
is  the  payment  for  the  factor  of  nature,  wage  the  payment  for 
the  factor  of  labour,  and  interest — well,  interest  appeared  to 
have  no  substantial  foundation  if  it  also  could  not  be  inter- 

preted as  a payment  for  a third  independent  factor  of  produc- 
tioiu  It  did  not  seem  to  be  explained  theoretically,  nor — 
what  indeed  might  be  more  serious  to  the  theorists  in  question 
— to  be  justified  practically.  Thus  it  was  that  many  a learned 
thinker  was  driven  into  a corner,  and  preferred  rather  to  shut 
an  eye  to  clear  facts  than  to  sacrifice  the  independent  pro- 
ductivity of  capital,  and  with  it  the  welcome  basis  for  the 
current  theory  of  interest. 

Facts  certainly  spoke  with  perfect  distinctness.  It  was 
impossible  to  deny  that  capital  is  no  element  in  the  proper 
sense  of  the  word,  inasmuch  as  it  itself  springs  from  the 
co-operation  of  nature  and  labour.  Not  only  so,  but  by  a 
siugular  irony  of  fate  this  had  to  be  expressly  proved — as  it 
had  been  by  Adam  Smith  before  them — by  those  very  theorists 
who  maintained  its-  independent  productivity.  In  their  theory 
of  price,  in  having  to  show  how  all  prices  resolve  themselves 
finally  into  rent,  wage,  and  interest,  they  were  forced . to 
demonstrate  in  the  most  minute  wav  that  concrete  capital  is 
noj  an  element ; that,  for  instance,  copper  and  steel,  which 
serve  as  capital  in  the  manufacture  of  watches,  originate  in  the 
co-operation  of  the  natural  mineral  deposits,  of  the  work  of 
miners,  and  of  older  capitals,  which  themselves  have  originated 
in  similar  ways,  and  so  on.^  In  the  face  of  this,  to  maintain 
the  independent  productivity  of  what  they  had  just  demor- 
strated  to  be  a dependent  and  intermediate  product,  they  were 

^ e.g'.  Say,  Traite,  seventh  edition,  p.  344, 

H 


98 


FUNCTION  OF  CAPITAL  IN  PRODUCTION 


BOOK  II 


driven  to  adopt  vftry  singiilar  expedients^'  The  favourite  ones 
were  obscurity  and  brevity.  Instead  of  making  an  earnest 
effort  to  bridge  the  yawning  contradiction,  they  either  did  not 
suggest  the  doubt  at  all,  or,  if  a doubt  had  already  been  raised, 
they  dismissed  it  with  some  laconic  phrase  or  other.  A long 
series  of  writers  make  no  scruple  about  expounding  capital  on 
one  page  as  a factor  of  production  “ derived  ” from  nature  and 
labour,  and  on  the  next  as  a third  independent,  Jactoi.  of 
production  along  with  nature  and  labour.^  Mill  has  so  far 
yielded  to  the  pressure  of  facts  as  to  admit  that  capital  is 
itself  the  product  of  labour,  and  that  its  instrumentality  in 
production  is  therefore  in  reality  that  of  labour  in  an  indirect 
shape.  But  with  a quick  turn  he  saves  its  independence. 
“ Not  the  less,”  he  continues,  “ does  it  require  to  be  specified 
separately.  A previous  application  of  labour  to  produce  the 
capital  required  for  consumption  during  the  work  is  no  less 
essential  than  the  application  of  labour  to  the  work,  itself.”  ^ 
Therefore,  because  labour  must  be  applied  twice,  in 
different  stages  of  production,  something  else  besides  labour- 
must  be  recognised  as  the  independent  condition  of  productionj 
Some  writers,  of  course,  treat  the  matter  more  seriously. 
They  do  not  evade  the  difficulty,  but  try  to  get  a real  solution 
of  it.  They  cannot  overlook  the  fact  that  capital  first  comes 
into  existence  through  combination  of  simpler  factors.  Quite 
correctly,  therefore,  they  do  not  attempt  to  claim  for  capital 
itself  the  character  of  an  element ; but  they  still  require  an 
independent  support  for  interest.  This  they  obtain  by  resolv- 
ing capital  into  its  elements,  and  finding  jthaLJaesldes  nature 
^nd  labour,  there  is  stiU  a third  independent  element  •.  Senior 
^alls  it  AbstinenceTHermann  calls  it  the  Use  of  Capital.  These 
attempts  at  solution,  which  I went  into  in  detail  and 
pronounced  upon  in  my  former  book.  Capital  and  Interest, 
were  certainly  not  very  happy.  Hermann’s,  in  particular,  is 
singularly  unfortunate  in  being  obliged  to  explain  the  “ use  ” 
which  capital  gives  as  more  elementary  than  capital  itself — as 
if  the  egg  which  the  hen  lays  is  antecedent  to  the  hen ! 

^ Of  older  writers,  e.g.  B.  Fulda,  Grundsdtze  der  Ode,  pol.  or  Kameralwissen- 
schaften,  second  edition,  1820,  p.  135  ; Sclidn,  Neue  Untersuchung  der  Natimial- 
Oekonomie,  1835,  p.  47.  Of  later  writers  Cossa  ■ himself,  Elementi,  eighth 
edition,  p.  34  ; and  Gide,  Principes  d’£c.  Pol.  1884,  pp.  101,  145. 

- Book  i.  chap.  vii.  § i. 


CHAP,  in 


NOT  AN  INDEPENDENT  FACTOR 


99 


Nevertheless  as  regards  our  present  question  these  theories  are 
very  instructive.  They  show  that  several  of  our  most  clear- 
sighted thinkers  prefeiTed  to  take  refuge  in  the  most  hazardous 
and  artificial  constructions  rather  than  agrep  in  t,hp.  current 
doctrine  that  capital  itaelf.  while  originating  in  the  co-operation 
of  nature  and  labour,  is.  all  the  same,  an  " indpppridp.nf'.  ” fac.tnr 
of  production  along  with  them  ! 

We  mny  confidently,  then,  strike  capital  out  of  the  list  of  ^ 
independent  productive  powers,  as  a portion  of  the  English 
school  did  long  ago,  and  as  the  Socialists  have  done  more 
recently.  I may  say,  however,  that  the  manner  in  which  they 
have  done  so  is  not  quite  appropriate.  In  the  instrumentality 
of  capital  they  see  only  the  instrumentality  of  the  labour 
expended  in  producing  it ; they  explain  it  as  “ previous  stored- 
up  labour.”  This  is  not  correct.  Capital — to  keep  the  same  ^ 
form  of  expression — is  “ stored-up  labour,”  but  it  is  something 
more ; it  is  also  stored-up  valuable  natural  power.  It  is  the 
medium  through  whicBTthe  two  original  productive  powers  exert 
their  instrumentality.  To  the  instrumentality  of  gold,  which 
is  employed  as  capital  in  gilding  the  lightning-rod,  the  labour 
of  the  miner,  who  finds  the  ore  and  refines  it,  is  not  the 
only  contributory : nature  also  has  contributed  her  share  in 
depositing  the  valuable  vein  or  placer. 

Although,  then,  we  have  traced  its  instrumentality  in  pro- 
duction  to  nature  and  labour,  is  capital  itself  not  productive  at 
aU?  Certainly  it  is,  in  more  than  one  sense  of  that  too  ambiguous 
word.^  It  is,  first,  “ productive  ” because  it  finds  its  destina-'^ 
tion  in  the  production  of  goods : it  is,  further,  productive*^ 
because  it  is  an  effectual  tool  in  completing  the  roimdabout 
and  profitable  methods  of  production  once  they  are  entered  on  ; 
finally,  it  is  productive  indirectly  because  it  makes  the  adoption‘s 
of  new  and  profitable  methods  possible.  One  thing,  however, 
it  is  not ; jL-ia_not  indeyendentlv  productive  in  the  sense  on 
which  the  most  important  part  of  the  controversy  turns.  As 
the  old  economist  Lotz  expressed  it,  briefly  and  succinctly ; 

■“  Of  any  independent  labour  in  capital  there  is  simply  no 
question.”  ^ 

' See  Capital  and  Interest,  p.  114. 

- Handhuch  der  Staatswirthschaftslehre,  Erlangen,  1821,  i.  p.  66,  in  note. 


CHAPTEK  IV 


THE  THEORY  OF  THE  FORMATION  OF  CAPITAL 

In  our  science  there  are  three  views  in  circulation  as  to  the 
formation  of  capital.  "^One  finds  its  origin  in  Saving,  a second 
in  Production,  and  a third  in  both  together.  Of  these  the 
third  enjoys  the  widest  acceptance,  and  it  is  also  the  correct 
oim  Put  the  formulawill  have  to  be  amplified  to  some 
extent,  and  presented  in  a way  that  is,  at  once,  clearer  and 
more  true  to  life  than  has  Usually  been  the  case.^ 

The  dispute  as  to  the  share  which  Saving  plays  in  the  formation  of  capital 
is  almost  as  old  as  economic  science.  The  theory  which  ascribed  it  the  prominent 
place  was  the  first  to  appear.  Already  suggested  by  the  Physiocrats,  it  was 
formulated  by  Adam  Smith  in  the  often-quoted  proposition,  “ Parsimony  and  not 
industry  is  the  immediate  cause  of  the  increase  of  capital  ” ( Wealth  of  Nations, 
book  ii.  chap,  iii.)  Supported  by  his  authority  it  was  for  a long  time  almost 
the  only  one  that  held  the  field,  and,  although  in  later  times  it  has  suffered  many 
reverses,  it  still  finds  some  notable  apostles : thus,  among  others,  Mill — “ Capital 
is  the  re.sult  of  saving  ” (book  i.  chap.  v.  § 4) ; Roscher — “Capital  is  mainly  the 
result  of  saving  ” {Grundlagen,  § 45) ; Francis  Walker — “ It  arises  sulely  out  of 
savin It  stands  always  for  self-denial  and  abstinence”  {Political  Economy, 
p.  67).  But  from  a very  early  period  there  was  sharp  opposition  to  the  thenyy.,. 
first  from  Lauderdale-  {Inquiry,  1804,  chap,  iv.)  ; then,  after  some  time,  from 
the  socialist  theorists,  Rodbertus  {Das  Kapital,  pp.  240,  267 — “Just  as  the 
capital  of  the  isolated  individual  originates  and  increases,  so  does  the  national 
capital, — only  through  labour  and  not  through  saving  ”)  ; Lassalle  {Kapital  und 
Arbeit,  p.  64) ; Marx  {Das  Kapital,  i.  second  edition,  p.  619).  To  these  opinion^ 
a great  many  recent  writers  of  otlier  schools  more  or  less  incline  : thus,  very 
clearly  and  decidedly,  Gide  {Principes,  p.  167) ; less  decidedly,  Klein wiichter  (in 
Schbnberg’s  Eandbueh,  second  edition,  p.  213),  and  R.  Meyer  {Das  Wesen  des 
Einkennmens,  1887,  p.  213)  ; more  by  way  of  reconciliation,  Wagner  {Orundle- 
gung,  second  edition,  § 298) ; and,  a little  obscurely  and  confusedly,  Cohn 
{Grundlegung,  1885,  § 257).  Although,  however,  this  tendency  to  ascribe  capital 
to  labour  is  unmistakably  rapidly  gaining  ground,  that  view  which  ascribes  to. 
saving  a share  in  the  formation  of  capital  is  stillAlie  view  of  the  majority.  But 
the  later  representatives  of  this  view  are  in  the  habit  of  rightly  limiting  it,  and 


CHAP.  IV. 


SA  VING  AND  PRODUCING 


101 


To  put  the  matter,  first  of  all,  in  its  simplest  conceivable 
terms.  Suppose  a recluse  working  a.bsnlntely  without  capital 
— say  some  Eobinson  Crusoe  thrown  on  a lonely  shore  without 
either  tools  or  weapons.  Being  without  capital  he  must  at 
first  support  hfe  in  the  most  primitive  fashion,  as,  for  instance, 
by  gathering  berries  which  grow  wild.  Now  what  must  happen 
before  he  can  get  possession  of  his  first  capital,  say  a bow  and  ^ 
arrow  ? ^ 

Let  us  put  the  first  theory  to  the  test.  Is  saving  by"^. 
itsp.lf  .qnfRcient  to  call  capital  into  existence  ? Certainly  not, 

With  the  one  possession  that  he  has — his  wild  fruits — our 
Crusoe  may  save  and  stint  as  much  as  he  please;  he  will^  . , . 
accumulate  a store  of  berries — goods  for  consumption — but 
that  will  never  give  him  a single  botv  or  arrow.  As  we  can 
easily  see,  these  must  be  positively  produced. 

Ts  i>,  .<;nffip.ipnt  l.bpTi  for  tbp.  nriOTnatinn  nf  Piipital  that  it 
be  produced  ? Again,  certainly  not.  Of  course,  once  Crusoe 
has  got  the  length  of  commencing  to  produce  capital,  the 
formation  of  capital  is  as  good,  as  accomplished.  But  before 
he  gets  that  length,  thpre  is  something  else  to  be  done,  and 
that  something  is  by  no  means  self-evident.  Productive- 
powers  are  to  be  set  free  for  the  proposed  formation  of  capital^ 

and  this  can  only  be  done- as  we  shall  see,  through  saving_ 

The  amoimt  of  original  productive  powers  which  our 
Crusoe  has  daily  at  his  command  is  equivalent  — leaving 
natural  gifts  out  of  account — to  one  day’s  labour,  which  we 
shall  assume  to  be  ten  hours  of  labour.  Suppose,  now,  that 
the  berries  within  reach  of  his  hut  are  so  scarce  that  a full 
day’.c!  Iflbnnr  nf  tp.n'hours  is  necessary  to  provide  as.jmuGb-food 
as  wEL  just  support  him  in  bare  life,  obviously  no  formation  of 

capital  is  possible.  There  is  no  use  advising  him  to  produce 
a bow  and  arrows.  Producing  requires  time  and  strength, 
and  all  the  time  and  strength  our  Crusoe  has  is  fully  claimed 

expressly  emphasising  the  fact  that  saving  alone  is  not  sufficient,  and  that  there 
Tnii.st  also  be  “labour,”  or  “ devotion  to  productive  purposes,”  or  such  like — 
which,  indeed,  may  very  well  have  been  the  true  meaning  of  many  of  the  older 
adherents  of  the  Saving  theory,  and  only  not  expressed  by  them  because  of  its 
assumed  obviousness.  See,  e.y.,  {Volksicirthschaftslehre,  eighth  edition,  i, 

§ 133),  Eicca-Salemo  {Sulla  Teoria  del  CapUale,  chap.  iv.  p.  118 — “II  capitale 
deve  la  sua  origine  aU’  industria  e al  risparmio  ”),  Cossa  {ElemcTUi,  eighth 
edition,  p.  39),  and  many  others. 


102  THEORY  OF  THE  FORMATION  OF  CAPITAL  book  ii 


already  to  keep  him  in  life.  To  produce  capital,  then,  may  be 
difficult  enough  without  something  else ; and  what  that  is  will 
appear  immediately  on  our  varying  a little  the  assumed  facts 
of  the  illustration. 

Suppose  there  is  such  wealth  of  berries,  that  the  result 
of  nine  hours’  gathering  is  sufficient  to  support  bare  life.  whUe 
ten  hours’  gathering  gives  a return  such  as  to  guarantee  a 
subsistence  amply  sufficient  to  maintain  Crusoe  in  health  and 
strength.  Obviously,  h.e„has  now  a choice  between  two  lines 
of  conduct.  Either  he  may  take  advantage  of  the  opportunity 
thus  offered  to  complete  his  provision,  and  consume  each  day 
the  fruits  of  an  entire  ten  hours’  day  of  labour — in  which  case 
it  is  perfectly  clear  that  he  has  now  no  time  and  strength  left 
to  make  a bow  and  arrows ; or,  although  the  productive  power 
at  his  disposal  would  enable  him  to  live  better,  he  may  content 
himself  with  the  barest  liviag.  which,  as  we  said,  can  be 
provided  by  the  nine  hours’  labour  of  gathering ; then,  and 
then  only,  has  he  a tenth  hour  free  in  which  to  make  weapons 
for  future  use.  This  amounts  to  saying,  in  other  words,  that, 
before  capital  can  actually  be  formed,  the  productive  pnwe.rp 
necessary  to  its  making  must  be  _by  enernaebing  nn  the 
Tnoment’a  enjoyment. 

To  anticipate  and  avoid  a mistake  very  apt  to  be  made,  it 
must  be  said  distinctly  that  this  encroaching  on  the  moment’s 
enjoyment  .need  by  no  means  involve  downright  privation. 
With  more  productive  labour,  Crusoe’s  choice  would  not  lie,  as 
in  the  above  illustration,  between  bare  Living  and  comfortable 
living  but,  perhaps,  between  comfortable  and  ample  living.  It 
is  not  a question  of  the  absolute  insignificance  of  these  claims 
on  the  moment’s  enjoyment,  but  on  their  relation  to  that 
amount  which  I may  indicate  in  the  shortest  and  most 
generally  intelligible  way  by  the  word  “ Income  ” — -an  expres- 
sion, unfortunately^  not  yet  strictly  enough  defined  in  scientific 


usage. 


1 On  the  many  divergent  and  contradictory  readings  of  the  conception  of 
Income,  see  E.  Meyer’s  Baa  Wesen  des  Einkommens,  1887,  particularly  pp.  1-27. 
I purposely  avoid  going  into  the  controversy  as  to  this  conception,  which  Meyer’s 
work,  notwithstanding  its  many  merits,  seems  to  me  to  have  by  no  means 
adequately  settled.  Where  1 use  the  word  Income  in  the  sequel  it  i^  to  be 
understood,  not  in  Meyer’s  sense,  hut  in  a sense  very  much  in  agreement  with 
popular  nsage^ 


CHAP.  IV 


SAVING  OF  PRODUCTIVE  POWERS 


103 


productive  powers  should  not  be  entirely  claimed  for  t.ha 
immediate  consumption  of  the  current  period,  but  that  a 
portion  of  this  endowment  should  be  retained  for  the  service 
of  a future  period.  But  such  a retention  will  undoubtedly  be 
called  a real  saving  of  productive  powers. 

A saving  of  nroductive  powers,  be  it  noted : for  productive^ 
powers,  and  not  the  goods  which  constitute  capital,  are  the 
immediate  object  of  saving.  This  is  an  important  point, 
which  must  be  strongly  emphasised  because,  in  the  current 
view,  too  little  consideration  is  given  to  it.  Man  saves 
consumption  goods,  his  means  of  enjoyment ; he  thus  saven 

productive  powers,  and  with these  finally  he  cam. 

capital.^  It  is  only  exceptionally  that  capital  itself  is  the 
immediate  object  of  saving  ; it  may  happen  in  the  case  of  those 
goods  which,  by  nature,  admit  of  being  used  either  for  con- 
sumption or  for  production,  such  as  grain.  To  the  extent 
that  a man  withdraws  such  goods  from  immediate  use  in 
consumption,  his  saving  directly  lays  the  foundation  of  capital. 

To  build  on  that  foundation,  of  course,  the  negative  element  of 
saving  must  have  added  to  it  the  positive  element  of  devoting 
the  saved  goods  to  production,  as  intermediate  products. 

It  is  easy  to  show  that  every  further  increase  of  the 

existing  stock  of  capital  is  limited  by  the  same  conditions 
the  first  formation.  Assume  that  for  a month  our  Crusoe 
consumes  daily  only  so  much  fruit  as  he  can  gather  in  nine 
hours’  labour,  and  devotes  the  tenth  hour  to  making  weapons. 

As  result  of  this  thirty  hours’  work  he  now  owns  a bow  and 
arrows,  and  jn  them  hp.  has  the  possibility  of  making  his 
living  much  more  easily  and  amply  than  before.  Naturally 
his  desires  widen.  He  wishes  decent  clothes,  a house,  all  sorts 
of  things  that  minister  to  comfort.  But  for  these  he  requires 
the  suitable  intermediate  products — axes,  nails^  braces,  etc. 
Now  we  ask  further  what  kind  of  conditions  must  be  fulfilled 
that  Crusoe  may  obtain  this  new  capital  ? 

This  is  very  easily  answered.  If  he  makes  use  of  the 
improved  circumstances,  which  he  owes  to  the  possession  of 

^ Adam  Smith’s  celebrated  proposition  therefore — “Parsimony  and  not 
industry  is  the  immediate  cause  of  the  increase  of  capital  ” — is,  strictly  speaking, 
to  be  turned  just  the  other  way  about.  The  immediate  cause  of  the  origin  of. 
capital  is  production  ; the  mediate  cause  is j.  previous  saving. 


104  THEORY  OF  THE  FORMATION  OF  CAPITAL  book  ii 


the  bow  and  arrows,  simply  ^ increa^  his 
smnpti<2n — that  is,  if  he  spends  the  whole  labour  time  at  his 
disposal  in  the  service  of  the  moment,  hunting,  gathering  fruits, 
and  sleeping, — not  only  is  it  impossible  for  him  to  acquire  new 
capital,  but  he  will  lose  the  old.  Bows  and  arrows  do  not 
last  for  ever.  In  a month’s  time,  we  shall  say,  his  arrows  will 
be  spent,  and  his  bow  worn  out.  If,  therefore,  his  capital  is 
to  remain  in  existence,  he  must,  obviously,  employ  at  least  one 
of  the  ten  hours  in  renewing  his  weapons,  and,  at  the  most,  he 
can  employ  nine  only  in  gathering  and  hunting. 

To  put  it  in  propositional  form.  To  retain  capital  in 
{/ existence,  man  must  make  over,  and  devote  to  the  service  of 
the  future,  at  least  so  much  of  the  productive  powers  of  the 
current  period  as  he  has  consumed,  during  the  current  period, 
of  the  produce  of  forimr  productive  powers.^  Or,  to  put  it 
in  other  words,  the  consumption  of  the  current  period  is 
limited  by  the  produce  of  as  many  productive  powers — present 
and  past  taken  together — as  come  into  existence  anew  during 
the  current  period. 

Finally.— i£-an  increase  of  capital  is  to  become,  - possible, 
obviously  a still  greater  proportion  . of  tha  current  productive 
powers  must  be  withdrawn  from  the  consumption  of  tb^ 
present,  and  transferred  to  the  service  of  Uie  fu^re^  of  his 
ten  hours  of  labour  our  Crusoe  must  devote  one  to  renewing 
his  weapons,  and  less  than  nim&  to  gathering  berries  and  killing 
game,  if  he  is  to  make  the  new  capital  he  desires  in  what 
remains  free  of  his  labour  time.  To  put  it  generally,  he  must 
curtail  the  immediate  consumption  of  the  current  period  to 
such  a point,  that  it  uses  up  the  produce  of  fewer  (past  and 
present)  productive  powers  than  come  into  existence  anew  in 
the  same  period ; he  must,  in  a word,  save  productive  powers. 

All  this  is  quite  clear  and  simple ; indeed  it  is  even  a 
little  too  simple  for  our  purpose-  Robinsonades  and  pictures 


^ It  k only  in  cases  -wlLere,  in  the  meanwhile,  the  technignB  of  the  partienlar 
production  has  improved,  that  the  transference  of  a less  anionnt_of  4)rQdiicj±Ee 
powers  to  the  service  of  the  future  is  sufficient.  If,  for  instance,  Crusoe  learns 
how  to  make  in  fifteen  days  those  weapons  which  formerly  had  taken  thirty 
days,  it  is,  of  course,  sufficient  for  the  upkeep  of  the  capital  if  he  works  only  half 
an  hour  daily  at  the  repair  of  his  weapons,  and  nine  and  a half  hours  can 
be  spent  in  directly  obtaining  a more  plentiful  maintenance  without  prejudic  to 
his  economical  position. 


CHAP.  IV 


SAVING  OF  PRODUCTIVE  POWERS 


105 


of  primitive  circumstances  are  very  good  when  the  object  is  to 
present  clearly  the  simplest  typical  principles — to  give  a kind 
of  skeleton  of  economical  procedure, — and  to  that  extent,  I 
trust,  our  Kobinsonade  also  has  done  good  service.  But, 
naturally,  they  cannot  give  us  an  adequate  picture  of  those 
peculiar  and  developed  forms  in  which  this  skeleton  clothes 
itseU’  in  the  living  actuality  of  a modern  economic  community. 
And  it  is  just  at  this  point  that  it  becomes  important  to  fill 
out  the  abstract  formula  with  explanation  and  illustration 
taken  from  Hfe.  We  shall,  therefore,  leave  the  lonely  shore 
of  our  Crusoe,  and  come  to  the  industrial  conduct  of  a.  great- 
nation  with  its  millions  of  people. 


CHAPTEE  V 


FOEMATION  OF  CAPITAL  IN  A COMMUNITY  • 

Let  US  take  the  case  of  a community  embracing  tp.n  Tnillirms 
of  able-bodied  persons.  Leaying  out  of  account  the  current 
uses  of  land,  so  as  not  to  cumber  the  statement  unnecessarily, 
the  annual  endowment  of  such  a nation — its  original  productive 
powers — thus  amounts  to  ten  million  years  of  labour.  Its. 
accumulated  stock  of  capital,  we  shall  suppose,  represents,  tha 
fruit  of  thirty  million  labour -years  (and  a corresponding 
amount  of  uses  of  land)  invested  during  previous  economic 
years  in  intermediate  products.  Now  look  at  the  constitution 
of  this  stock  of  capital  more  closely. 

Every  capital  is,  by  its  nature,  composed  of  a mass  of  inter- 

mediate products,  and  the  common  goal  of  all  these  products 
is  to  ripen  into  consumption  goods  or  means  of  enjoyment. 
They  reach  this  goal  through  the  continuation  of  that  produc- 
tion process  in  the  course  of  which  they  themselves  have  come 
into  existence.  They  are  all,  as  it  were.jaiL  the  way  towards 
the  goal  of  human  consumption.  But  the  length  of  the 
road  which  they  have  had  to  travel  is  different.  This  is 
partly  because  the  various  branches  of  production  adopt  round- 
about ways  of  various  length : mining,  for  instance,  or  railway 
building,  takes  a much  more  roundabout  and  lengthy  method 
than  wood-cutting.  But  it  is  partly,  also,  because  those  goods 
which  constitute  the  community’s  capital  at  the  moment  are  at 
various  points  on  their  respective  roa^.  Many  an  inter- 
mediate product  has  just  entered  on  a very  lengthy  roundabout 
road,  as,  for  instance,  a boring  machine,  whose  life-work  it 
will  be  to  drive  a gallery  in  a mine.  Some  are  midwaY. 
Others,  again,  like  clothing  stuffs  ready  for  making  into  coats 


Fig.1. 


1 


108  FORMATION  OF  CAPITAL  IN  A COMMUNITY  book  n 


and  mantles,  are  near  the  end  of  the  journey  their  particular 
production  process  has  to  take.  Now  the  inventory  of  capital 
lays  a kind  of  cross-section  through  the  production  -processes. 

thus  unlike  in  length  and  unlike  in  stage  of  progress,  and 
intersects  them,  of  course,  at  the  most  different  points,  just 
as  a national  census  lays  a section  through  the  paths  of  life, 
and  encounters  and  registers  the  individual  members  of  the 
nation  at  the  most  different  stages  of  life. 

Considered  with  reference  to  the  varying  distances  at 
which  intermediate  products  lie  from  the  goal  of  consumption, 
the  total  mass  of  capital  divides  itself  into  a nnmhp.r  of  annual 

classes  or  stages  of  maturity,  which  may  he  very  appropriately 
piGtnrp.d  hy  a.  rliagram  of  concentric  annual  circles.  The  out- 
most circle  (Fig.  1)  embraces  those  goods  which  will  be  trans* 
formed  into  goods  ready  for  consumption. 'within  the  coming 
year ; the  second  circle  represents  those  goods  which  will 
ripen  into  consumption  goods  in  the  year  after ; the  third 
circle,  those  which  'will  be  ready  the  year  after  that,  and  so  on. 
In  a community  where  production  is  not  yet  strongly  capital- 

istic, the  inner  circles  will  rapidly  contrn.ct  (Fig.  2),  because, 
in  such  a community,  very  lengthy  roundabout  ways  of  pro- 
duction, such  as  turn  out  their  finished  goods  only  after  many 
years,  will  be  rare.  In  rich  and  well-developed  communities, 
again,  there  will  be  a considerable  number  of  comprehensive 
circles,  and  of  these  the  inner  ones  will  have  a content  that, 
although  relatively  smaller,  is  not  inconsiderable. 

V This  representation  of  the  stages  of  maturity  by  concentric 
circles  is  peculiarly  appropriate  on  this  account  that  it  also 
g vpry  hi^ppy  expression  to  the  quantitative  relations  of 
these  stages.  Exactly  as  the  outmost  of  the  concentric  circles 
possesses  the  greatest  area,  while  the  inner  circles  possess  a 
gradually  decreasing  one,  does  the  first  of  these  classes — that 
nearest  to  the  completion  of  the  process — alway.s.  by  its  very 
nature,  embrace  the  largest  quota  of  the  total  mass  of  capital. 
while  a decreasingly  smaller  quota  falls  to  the  more  remote 
classes.  There  are _ two  reasons  for  this.  The  first  is  that 
the  various  branches  of  production  generally  adopt  processes 
of  different  lengths — lengths  varying  with  the  technical  cir- 
cumstances of  each  branch.  Many  complete  the  entire  work 
of  production,  from  the  preliminary  processes  to  the  turning 


CHAP.  V 


STAGES  OF  MATURITY 


109 


out  of  the  finished  product,  within  a year ; many  require  two, 
three,  and  five  years ; only  a few  have  a production  period 
extending  over  ten,  twenty,  and  thirty  years.  The  result  is 
that  in  the  highest  classes — those  farthest  removed  in  time 
from  the  finished  product — only  a few  branches  of  produc- 
tion are  found : intermediate  products,  for  instance,  in 
the  tenth  circle  can  only  be  provided  by  those  branches  of 
production  which  have  at  least  a ten  years’  production  period. 
But  the  lower  circles  are  filled,  not  only  by  those  last-named 
branches  of  production  (for  the  intermediate  products  of  these 
very  long  processes  must  pass  circle  by  circle  towards  maturity), 
but  also  by  those  branches  of  production  which  have  shorter 
periods.  Thus  the  quantity  of  intermediate  products  grows 
larger  and  larger  up  to  the  first  class,  and  to  this  first  class 
every  branch  of  production,  without  exception,  sends  its 
representative. 

But  there  is  still  another  circumstance  that  works  in  the 
same  direction.  The  ripening  of  intermediate  products  into 
consumption  goods  demands  a steady  addition  of  current  pro- 
ductive powers.  At  each  stage  of  the  production  process  new*^ 
labour  is  added  to  the  intermediate  productS-3vh.ich  have  been 
passed  on  to  it  from  the  previous  stage,  and  they  pass  on  to 
the  following  stage  in  a more  advanced  state.  In  one  stage 
the  intermediate  product  wool  is  changed,  by  the  addition  of 
labour,  into  the  intermediate  product  yarn ; that  again  in  a 
following  stage,  by  the  addition  of  labour,  into  the  intermediate 
product  cloth,  and  so  on.  This  has  the  natural  result  that, 
within  each  branch  of  production,  the  amount  of  invested 

capital  increases  with  each  advancing  stage  of  the  production, 

or,  what  is  the  same  thing,  at  every  change  into  a lower 

circle.  Consequently  not  only  are  the  lower  circles,  as  has 
been  shown,  supplied  from  more  branches  of  production,  but 
they  are  supplied  with  relatively  larger  amounts  of  capital, 
and  this  gives  the  lower  classes  a twofold  numerical  superiority 
over  the  higher  ones.^ 

On  these  lines  we  may  now  put  our  illustration  into 
figures.  To  facilitate  our  survey  we  shall  assume  that  the 


^ Durable  productive  goods,  which  give  off  their  use  gradually  in  the  course 
of  several  years,  belong  naturally  (in  various  parts  of  their  content  as  uleful  goods, 
or  in  various  annual  circles  of  their  activitvi  to  several  circles  simultaneously. 


no  FORMATION  OF  CAPITAL  IN  A COMMUNITY  book  ii 


total  capital  of  the  community  is  comprised  in  ten  yearly 
circle.  If  thirty  million  labour-years  are  embodied  in  this 
total  capital  (for  simpbcity’s  sake  I again  leave  out  invested 
uses  of  land)  we  may  assume  the  following  division  of  the 
circles.  The 

1st  circle  contains  the  intermediate  products  of  6 million  labour-years. 


2d 

5) 

55 

55 

5 

55 

55 

3d 

55 

55 

4 

55 

55 

4 th 

15 

55 

55 

3-5 

55 

55 

5 th 

11 

55 

55 

3 

55 

55 

6th 

5) 

55 

55 

2-5 

55 

55 

7 th 

51 

55 

55 

2 

55 

>5 

8th 

55 

55 

55 

1-7 

55 

55 

9th. 

15 

55 

55 

1-3 

55 

55 

IQth 

51 

55 

55 

1 

55 

55 

In  the  normal  course  of  things  the  outmost  circle  hecnme.ci 
divided  off  from  capital  each  year,  and  is  changed  into  con- 
sumption goods,  but  the  succeeding  circles  press  forward,  each 
circle,  by  the  addition  of  new  labour,  advanced  one  stage, 
both  as  regards  nearness  to  maturity  and  amount  of  capital 
invested.  The  first  class,  therefore,  is  changed  into  consump- 
tion goods,  the  second  class  into  the  first,  the  third  into  the 
second,  and  so  on.  Now  the  following  important  questions 
suggest  themselves.  What  use  must  the  community  make 
of  the  original  productive  powers  which  come  anew  into  its 
possession  during  the  current  year — that  is  to  say,  the  new 
ten  million  labour-years  if,  for  simplicity’s  sake,  we  still  leave 
out  uses  of  land — in  order  to  conserve  the  capital  that  is  in 
existence  ? And  how  must  it  act  to  increase  that  capital  ? 

I These  questions  are  easily  answered.  To  keep  the  capital 
at  the  present  level  the  community  must  not  spend  more  than 
four  milHon  labour-years  in  present-time  production.^ 

With  the  remaining  six  miUion  labour-years  the  stock  of 

^ Under  this  name  {Gegenwartsproduktion)  I mean  to  group,  for  the  sake  of 
shortness,  all  those  acts  of  production  which  agree  in  this,  that  the  original  prn- 
ductiye  powers  which  are  put  forth^jnthese  acts  reach  their  goal,  and  tunLcmt 
consumption  goods,  within  the  same  economic  period.  This  applies  to  two  kinds 
of  productive  acts-;  partly  and  principally  to  those  of  the  final  stages,  the  labour 
required  to  transform  the  first  circle  of  capital  into  consumption  goods  {e.g.  agri- 
cultural labour,  the  labour  of  the  miller,  baker,  shoemaker,  tailor,  etc.),  partly 
to  industries  where  the  production  process  is  short,  and  can  be  carried  through 
from  beginning  to  end  within  a single  ecohomic  period. 


CHAP.  V INVESTMENT  OF  PRODUCTIVE  POWERS 


111 


capital,  reduced  by  the  separating  ofi'  of  the  first  year’s  circle, 
must  be  brought  up  in  quantity  and  quality  to  its  former 
kvel.  This  demands  that  the  nine  other  yearly  circles  be 
brought  each  one  step  nearer  maturity  by  the  addition  of  the 
requisite  labour,  and  that  the  tenth  class,  which  is  now  non- 
existent, be  new  created.  The  amount  of  labour  necessary  for 
this  may  be  exactly  determined.  The  former  second  class,  in 
which  as  yet  only  five  million  labour-years  have  been  embodied, 
needs,  in  order  to  make  it  entirely  equal  in  value  to  the  former 


class 

ij  3.11 

addition  of 

1 million  labour-years. 

The 

3d  class  needs  an 

addition  of  1 

55 

55 

>5 

4th 

55 

55 

0-5 

55 

55 

5th 

55 

55 

0-5 

55 

55 

6th 

55 

55 

0-5 

55 

55 

)> 

7 th 

55 

55 

0-5 

55 

55 

55 

8th 

55 

55 

0-3 

55 

55 

55 

9th 

55 

55 

0-4 

55 

55 

55 

loth 

55 

55 

0-3 

55 

55 

And  the  creation  of  a 

new  10th 

class  requires  the  labour  of 

1 

55 

55 

In  all 

6 

55 

55 

It  should  be  noted  that  it  is  not  a matter  of  indifference 

at  what  point,  in  which  partiV.nlar  circles,  the  six:  million 

labour-years  are  spent.  If,  for  instance,  they  were  to  be  spent 
in  making  intermediate  products,  but  not  according  to  the 
above  distribution — say  they  were  aU  spent  in  making  inter- 
mediate products  of  the  first  circle,  which  would  come  to 
maturity  in  a year’s  time — the  disadvantage  would  be  two- 
fold : first,  the  production  processes  which  had  only  got  the 
length  of  intermediate  products  of  the  higher  classes  would  be 
brought  to  a standstill ; and  second,  as  we  know,  the  shorter 
methods  would  be  loss  prndnctivp..  With  six  million  labour-years 
invested  in  a one  year’s  process,  the  present  would  hand  over 
to  the  future  the  same  number  of  productive  powers  indeed, 
but — what  in  the  last  resort  is  the  important  thing — these 
powers  would,  in  virtue  of  their  one  year’s  process,  be  capable 
of  producing  only  a smaller  amount  of  products  than  the 
present  has  received  for  consumption  from  the  past.  The 
next  .year’s  production,  therefore,  would  necessarily  be  reduced, 

and  the  stock  of  capital  would  not  be  maintained  at  its  former 
level 


112  FORMATION  OF  CAPITAL  IN  A COMMUNITY  book  i 


A^ain.  if  the  present  stock  of  capital  is  to  be  increased,  it 
is  evidently  necessary  that  the  community  give  up  a portion 

of  the  consumption  which  it  might,  havo  enjoyp.tj- — while  still 
I maintaining  the  stock  at  its  former  height ; — that  it  withdraw 
V/  a portion  of  the  productive  powers  at  its  disposal  from  the 
service  of  the  present ; that  it  save  and  employ  them  for 
additional  future  production.  Productive  powers  may  be 
saved  in  various  ways.  (1)  Other  dispositions  remaining 
unchanged,  a smaller  portion  of  the  current  productive 
powers — say  three  instead  of  four  million  labour -years — 
may  be  employed  in  immediate  “ present -time  production.”  Or 
(2)  the  arrangements  for  saving  may  have  been  already  made, 
and  the  total  capital  organised  in  such  a way  that  the  circle 
which  is  now  passing  over  into  the  stage  nf  full  malnrity  cap- 
tains a less  quantity  of  capital,  say  five  instead  of  sLx  million 
labour -years.  Inasmuch,  then,  as  only  five  instead  of  six 
million  labour -years  are  now  required  for  the  replacement  of 
capital,  there  remains — if,  as  before,  four  out  of  the  ten  million 
labour-years  which  are  the  current  productive  endowment  are 
spent  in  “present-time  production” — one  million  over,  available 
for  the  -formation  of  pew  capital.  Or  (3)  it  is  conceivable  that, 
at  the  last  moment,  the  disposition  of  the  capitn.1  -should  be  so 
ajtered  that  less  passes  into  the  stage  of  _full  maturity  than 
was  originally  contemplated.  It  is  a familiar  fact  that  there 
are  many  goods  which  admit  of  being  employed  in  a 
variety  of  ways.  This  often  makes  it  possible  to  put  back 
goods  which  have  already  attained  full  maturity,  or  which 
stand  quite  near  to  maturity,  by  several  stages.  Gxaic,  for 
instance,  instead  of  being  ground  for  food  purposes,  may  be 
stored  for  seed,  or  used  in  distilling ; coal  may  heat  the  blast 
furnace  instead  of  the  domestic  oven  ; iron  may  build  machinery 
instead  of  park  railings ; and  so  on.  If,  by  thus  disposing 
goods  differently,  the  amount  of  capital  which  arrives  at 
maturity  becomes  reduced  from  six  to  five  million  labour- 
years,  there  will,  after  four  million  labour -years  have  been 
expended  in  “ present-time  production,”  be  one  million  labour- 
years  free  for  the  making  of  new  capital. 

All  three  methods,  then. — of  which,  in  practical  life,  the 
second  is  most  common,  and  the  first  is  least  so, — ‘agree  in  one 
essential  point,  that  during  the  current  year  the  produce  of 


CHAP.  V 


IN  THE  SOCIALIST  STATE 


113 


■millinn  labour-years  only  is  constimed,  while  ten  million 
labour- yeaxs  come  forward ; that  accordingly,  in  other  words, 
one  million  labour-years  of  the  current  productive  endowment 
are  saved.^ 

Hitherto  we  have  spoken  of  the  formation  of  capital  by  a 
community  as  if  in  such  a community  there  was  one  single 
economy,  guided  by  one  individual  wUl.  Of  course  this  is  not 
the  case.  It  remains,  therefore,  for  us  to  show  how,  in  a 
community  where  industry  is  divided  up  and  managed  by 
many  heads,  the  productive  forces  that  conduce  to  the  forma- 
tion of  capital  are  actually  disposed,  and  to  inquire  whether, 
as  we  have  maintained,  these  dispositions  presuppose  “ saving.” 

And  since  it  is  claimed,  and  not  without  reason,  that  universal 
truths  should  be  proved  to  hold  not  only  in  the  present  and 
historical  organisation,  but  in  every  social  organisation,  I pro- 
pose in  this  inquiry  to  look  both  at  the  actual  economic  form, 
wliich  is  pre-eminently  individualistic,  and  at  that  form  which 
is  at  least  conceivable,  the  sociahstic.  We  may  begin  with 
the  latter  as  being  the  easier  from  the  standpoint  of  our 
present  problem. 

In  a socialist  state  from  which  private  capital  and  private<^ 
undertaking  were  banished,  and  where  the  entire  national 
production  was  organised  by  the  state,  the — frirmatinn  pf 
capital,  and  the  •previnns  saving  of  productive  powers  necessary 
theiatp,  would  be  control! pri  nfiRpiflUy  The  method  would 

^ If,  during  the  current  year,  there  should  be  introduced  such  improvements 
in  the  technique  of  production  that  the  capital,  which  had  taken  six  million 
labour-years  to  produce,  could  be  fully  replaced  by  an  expenditure  of  five  million 
labour-years,  there  would  be  a change  in  the  figures  of  our  illustration,  but  the 
principle  would  remain  the  same  It  would  now  be  possible  to  preserve  the 
capital  already  in  existence,  even  if  five  million  labour-years  were  spent  in 
present  production,  and  if  the  produce  of  eleven  million  labour-years  in  aU  were 
spent  in  immediate  consumption  (see  above,  note  to  p.  104).  But  in  an^  case  tlm 
formatjuu-of  new  capital  would  require  the  renunciation  of  some  portion  of  that_ 

immediate  consumption  which  would  be  possible  if  it  were  only  wished  to  preserve 
capital  at  the  same  level ; in  other  words,  would  require  that  a portion  of  the 
“income,”  which  might  be  consumed  without  diminishing  the  stock  of  capital, 
be  not  consumed  but  saved.  Moreover,  if  technical  improvements  did  not  con- 
tinue to  be  made,  then,  after  some  years — that  is  to  say,  when  the  capital  pro- 
duced according  to  the  old  methods  of  production  was  quite  used  up, — the  old 
figures  would  come  true  again ; capital  tvould  be  kept  at  the  same  level  if  in 
_any  period  the  produce  immediately  consumed  just  corresponded  to  the  pin- 

ductive  powers  which  came  forward  anew  in  the  same  period. 


I 


114  FORMATION  OF  CAPITAL  IN  A COMMUNITY  book  ii 


simply  be  to  put  a considerable  proportion  of  the  national 
workers  to  very  lengthy  processes,  whereby  the  -makirig  of . 
capital,  in  the  form  of  intermediate  products,  would  . be  very 
^eat.  and  the  aTnoi^^it.  nf  matured  profiucts  iu  the  future  would 
l6e  much  increased.  Many  workers,  relatively  speaking,  would 
be  put  to  mining,  railway-building,  regulation  of  rivers,  machine- 
making, and  the  like,  and  few  to  wine-growing,  silk-spinning, 
lace-making,  beer-brewing,  cloth-making,  and  the  like.  The. 
people  would  thus  be  compelled  to,,  save,  by  pressure  from 
above,  inasmuch  as,  of  the  national  production  thus  conducted 
by  the  state,  in  each  year  relatively  few  goods  would  be  put 
at__t.heir  disposal  for  immediate  consumptioji: — less,  that  is  to 
say,  than  might  be  annually  produced  and  consumed  if  the 
existing  stock  were  merely  to  be  maintained.  The  productive 
powers  left  free  would  be  invested  in  lengthy  capitalist  pro- 
cesses of  production. 

Somewhat  more  complicated,  but  still  easy  to  grasp  in 
principle,  is  the  procedure  in  the  individualistic  organisation  of 
society  as  we  find  it  in  the  present  day.  Here,  in  the  first, 
instance,  it  is  the  undertakers  who  decide  how  the  productive 
powers,  as  they  come  forward  annually,  shall  be  employed,  and 
they  thus  decide  the  direction  which  the  national  production 
takes.  But  they  do  not  decide  it  at  their  pleasure ; they 
'^follow  impulses  given  by  the  prices  of  products.  Where  lively 
demand  promises  a profitable  price  they  extend  their  produc- 
tion, and  curtail  it  in  those  kinds  of  goods  where  failing 
demand  can  no  longer  take  off  the  supply,  and  the  prices  fall 
below  a paying  level.  Extension  and  contraction  of  supply 
continue  till  such  time  as  production  has  adapted  itself  to  the 
desire  for  the  particular  commodities.  Tp  tbc  last  resort. 
therefore,  it  is  not  the  undertakers  who  decide  the  direction  of 

national  production,  but  the  consumers,  the  “public”  All 
depends  on  the  effective  desire  they  exert  by  means  of  their 
income.  The  income  of  a people  is,  in  the  long-run,  identical 
with  the  return  of  its  production.  The  circle  that  represents 
a year’s  income  coincides,  roughly,^  with  the  circle  that  re- 


1 I have  neither  time  nor  desire  to  go  into  subtle  distinctions  here,  although 
there  is  material  enough  for  them.  Interesting  investigations  into  the  relation 
between  national  product  and  national  income — although  I cannot  altogether 
agree  with  them — may  be  found  in  R Meyer’s  book,  pp.  5,  84.  See  also  the 
investigations  of  Lexis  (which  appeared  while  the  present  volume  was  passing 


CHAP.  V 


IN  THE  INDIVIDUALIST  STATE 


115 


presents  a year’s  return  of  its  productive  powers.  If  every 
individual  in  the  community  were  to  consume  exactly  his 

year’s  inoome  in  the  form  of  consumption  goods,  there  would 
arise  a demand  for  consumption  goods  which,  through  the 
agency  of  prices,  would  induce  the  undertakers  so  to  regulate 
production  that,  in  each  year,  the  return  of  a whole  year’s 
circle  of  productive  powers  would  take  the  form  of  consumption 
goods.  If  ten  million  labour -years  (and  the  corresponding 
uses  of  land)  form  the  annual  endowment  of  a people,  and  this 
people  wishes,  to  consume,  and  does  consume,  the  whole  of  its 
income  in  the  form  of  consumption  goods,  it  is  a necessity  that 
the  produpp.  of  the  whole  ten  million  labour -years  (together 
witli  the  corresponding  uses  of  land)  be  changed  each  year 
into  the  form  of  consumption  goods.  In  this  case  there  is  no 
productive  power  left  to  dispose  of  in  increasing  capital,  and 
capital  only  remains  .as  it  was. 

If,  on  the  other  hand,  eacit  individual  consumes,  on  the 
average,  only  three-quarters  of  his  income,  and  saves  the  rest, 
obviously  the  wish  to  buy,  and  the  demand  for,  consumption 
goods  will  fall.  Only  thrcp-fniirtbs  of  thp.  former,  consumption 
goods-will  find  demand  and  sjle>.  If  the  undertakers,  however, 
were  for  some  time  to  continue  the  old  dispositions  of  produc- 
tion, and  bring  to  market  consumption  goods  to  the  amount  of 
ten  million  labour -years,  the  over -supply  would  very  soon 
press  down  the  price,  business  would  become  unremunerative, 
and  the  pressure  of  loss  would  compel  the  undertakers  to 
adapt  their  production  to  the  changed  circumstances  of 
demand.  They  will  now  provide  that,  in  one  year,  only  the 
produce  of  seven  and  a half  million  labour-years  is  transformed 
into  consumption  goods  (whether  it  be  by  the  maturing  of  the 
first  class,  or  by  adding  to  “ present-time  production  ^),  and 
the  two  and  a half  millions  wliich  remain  of  the  current  year’s 
endowment  may  and  will  be  spent  in  the  increasing  of  capital. 

I-  say  “ will  be  .spent.”  for  an  economically  advanced  people 
does  not  hoard.-  but  puts  out  what  it  saves- — in  the  purchase  of^ 

through  the  press),  entitled  Uehcr  gewisse  Werthgesammtheiten  und  derm  Bezieh- 
ungen  zwm,  Geldwerth  {Tubinger  Zeitschrift,  forty-fourth  year,  part  ii.  p.  221), 
where  also  the  yearly  “consumption  sum.”  “production  sum.”  and  “primary 

income  sum’’  are  treated  as  “quantitatively,  approximately  equal  ” amniints. 

^ The  change  of  disposition  will,  as  we  have  seen,  be  made  essentially  easier 

by  the  adaptability  of  many  forms  of  capital  to  various  uses. 


116  FORMATION  OF  CAPITAL  IN  A COMMUNITY  book  ii 


valuable  paper,  in  deposits  in  a bank  or  savings-bank,  in  loan 
securities,  etc.  In  these  wavs  the  amount  saved  becomes  part 
Qf  productive  credit : it  increases  the  purchasing  power  of  pro- 
d.ucers  for  productive  purposes ; it  is  thus  the  cause  of  an  extra 
demand  for  means  of  production  or  intermediate  products ; 
and  this,  in  the  last  resort,  induces  those  who  have  the  regula- 
tion of  undertakings  to  invest  the  productive  powers  at  their 
disposal  in  these  intermediate  products. 

We  see,  therefore,  as  a fact,  an  intimate  connection  bg,- 

tween  saving  and  formation  of  capitah  If  no  individual  saves, 
the  people,  as  a whole,  cannot  accumulate  capital,  because  the 
great  consumpt  of  consumption  goods  forces  the  producers,  by 
the  impulse  of  prices,  so  to  employ  the  productive  powers  that, 
every  year,  the  produce  of  a whole  year’s  endowment  is 
demanded  and  used  up  in  the  shape  of  consumption  goods, _ 
B.ud  no  prndnp.t.ive  powers  are  left  free  for  the  increasing  of 
capital.  But  if  individuals  save,  the  altered  demand,  again 


m 

ilAAAUlAAi)  . 

X 


CkVJlJ^ 
Ccrwr, 


through  the  impulse  of  prices,  compels  the  undertakers  to  dis- 
pose of  the  productive  powers  differently ; fewer  powers  are 
put,  each  year,  at  the  service  of  the  present,  and  thereby 
is  increased  the  amount  of  those  productive  powers  whose 
produce  will  be  found  in  suspense  as  intermediate  products ; in 
other  words,  the  economical  capital  will  be  increased  with  a 
view  to  an  increased  consumption  in  the  future. 

JSTow  there  is  stiU  a third  possibility.  Individuals  may 
consunle,  on  the  average,  more  than  their  income : instead  of 
saving  they  may  waste  their  parent  sum  of  wealth.  Accord- 
ing to  our  theory,  this  must  lead  to  a diminution  of  the 
community’s  capital,  and,  as  a fact,  it  does  so.  The  steps  of 
the  process  are  as  follows.  By  the  prevailing  extravagance 
more  than  a year’s  income  of  the  community,  and,  therefore, 
more  than  the  produce  of  one  year’s  circle  of  productive  powers, 
is  demanded  in  the  shape  of  consumption  goods.  Production. 
compelled  by  the  impulse  of  prices,  yields  to  the  deinand. 

V^or  instance,  the  former  disposition  was  that  the  first  circle, 
with  its  six  million  labour -years,  should  mature  during  the 
current  year,  and  that,  of  the  ten  million  labour -years  that 
form  the  current  endowment,  four  millions  should  be  spent  in 
“ present- time  production,”  and  the  other  six  in  replacing  the 
capital  consumed.  Now  we  shall  suppose  that,  through  the 


'I 


/W 


CHAP.  V 


NO  MYSTERY  ABOUT  IT 


117 


extravagant  manners  of  the  citizens,  the  year’s  demand  for 
consumption  goods  rises  till  it  requires  the  produce  of  twelve 
million  labour-years.  The  undertakers  will  act  in  something 
like  the  following  manner.  Of  the  current  labour  endowment 
they  will  invest,  perhaps,  not  four  but  five  million  labour- 

years  in  present  production,  and,  in  correspondence  with  this, 
the  amount  devoted  to  the  replacement  of  capital  will  shrink 
from  six  to  five  millions.  This  will  cover  one  million  of  the 
extra  amount  required.  At  the  same  time,  by  differently  dis- 
posing of  such  goods  as  allow  of  more  than  one  employment, 
they  will  perhaps  divert  the  produce  of  another  million  of 
labour-years  from  a more  remote  class  into  the  first  cla^jSj^aud^ 
thus  add  it  to  the  consumption  of  the  current  year.  This  will  '' ' 
cover  the  second  million  of  the  extra  demand.  The  com- 
munity now  receives  and  consumes  what  it  desires,,  the  pro-  T ^ /T  ^ 
duce  of  twelve  million  labour-years  in  the  form  of  consumption  t 
goods  hut  it  does  so  at  the  expense  of  the  stock  of  capital. 
which  is  insufficiently  replaced,  and  so  diminished  by  two 
million  labour-years.^ 

Possibly  I have  wasted  too  many  words  in  proving  a truth 
so  obvious  that  no  thinking  man  unskilled  in  science  would 
ever  doubt  it.  Every  child  knows  that  a piece  of  capital,  say 
a hammer,  must  be  produced  if  it  is  to  come  into  existence. 

And  to  every  simple  man  it  is  obvious  that  no  stock  of  capital 
can  he  made,  or  can  increase,  if  men  regularly  consume  their  ^ 

whole  available  income ; if,  in  other  words,  they  do  not  save. 

It  was  reserved  for  the  sharp  and  subtle  wits  of  learned 
theorists  to  suggest  the  first  doubt  about  it.  This,  however, 
it  would  have  been  difficult  to  do  if,  instead  of  dogmatising 
on  the  formation  of  capital,  they  had  attempted  to  give  a 
complete  and  faithful  repre.senta.tion  of  the  process  by  which, 
capital  is  formed.  Here  lies  the  entire,  but  almost  the  only, 
difficulty  of  these  and  many  other  economical  doctrines ; and 
this  suggests,  I might  add,  the  reason  whj^'  so  many  abstract 


^ Viz.  six  million  from  the  original  proyision  of  the  first  circle,  one  million 
diverted  and  added  to  that  by  changed  disposition,  and  five  millions  from  the 
current  labour  endowment. 

® The  stock  originally  embraced  the  return  of  thirty  million  labour-years  ; it 
now  gives  seven  millions  to  the  consumption  of  the  current  year,  and  it  receives 
only  five  millions  to  replace  them,  whereby  it  falls  from  thirty  to  twenty-eight 
million  labour-years. 


118  FORMATION  OF  CAPITAL  IN  A COMMUNITY  book  ii 


deductions  are  discredited  and  fail  of  result.  It  is  not  the 
deductive  method  that  deserves  the  distrust,  but  the  persons 
who  misap-ply  it.  Vulgar  errors  in  thought,  indeed,  are  quite 
exceptional  among  capable  thinkers;  and  here  the  fault  lies 
mostly  in  this,  that  the  economists  in  question  could  not  put  a 
sufficiently  clear  and  life-like  picture  before  their  minds-of  the 
circumstances  and  processes  which  they  introduced  into  their 
deductive  arguments  as  assumptions,  or,  at  least,  did  not  keep 
it  persistently  enough  before  them  through  all  stages  of  the 
deduction.  Hence,  losing  touch  with  life,  they  began  to  make 
deductions,  not  from  truth  of  facts,  but  from  words  of  formulas, 
and  so  fell  without  knowing  it  into  the  emptiest  dialectic.  It 
is  because  so  many  economists,  as  it  seems  to  me,  have  made 
this  mistake,  that  I risk  being  tedious  rather  than  being  sus- 
pected of  sophistry. 


CHAPTER  VI 


POSSIBLE  OBJECTIONS 

It  is  perhaps  advisable  to  supplement  our  positive  statement 
by  a brief  critical  consideration  of  the  most  important  objections 
that  might  be  urged.  Two  of  these  appear  to  me  particularly 
worth  noticing.  TLp.  firgf-.  is  that  the  majority  of  goods  which 
constitute  t^aoital  are,  by  nature,  quite  unfitted  tn  iTnTnpdifltp. 
consumption  There  is,  therefore,  no  sacrifice  in  withdrawing 
them  from  a use  which  they  could  never  serve.  Indeed,  it  is 
ridiculous  to  speak  of  the  “ non-consumption  ” of  steam-engines 
and  land  improvements,  of  roofing  tiles  and  bars  of  metal,  as 
an  act  of  saving  or  abstinence.^ 

To  me  this  seems  a somewhat  cheap,  but  still  perfectly 

good,  argument  against  those  who  formulate  the  theory  of 
saving  superficially  or  falsely.  But,  as  against  the  essence  of 
the  theory,  it  proves  nothing.  If  any  one  is  stupid  enough  to 
interpret  the  theory  of  saving  as  meaning  that  finished  capital, 
in  its  form  as  concrete  capital,  must  be  “saved,”  he  must 
submit  to  the  retort  that  man  cannot  eat  iron  machines.^  But 
this  is  not  at  all  the  meaning  of  any  thoughtful  representative 
of  the  theory.  What  is  maintaiped  is  only  that,  without 
saving,  capital  cannot  he  made  or  increased : that  saving  is  as  ^ 

indiappusaLIp  a npnrlif.ipn  nf  thp  formatinu  nf  capital  , 

And  this  is  literally  correct.  The  machines  themselves  have 

^ This  iH  very  strongly  pnt  by  the  Socialist  writers,  as,  e.g.,  Lassalle  {Kapital 
und  Arbeit,  p.  69) ; Rodbertus  (ZJas  KapUal,  p.  271).  In  a somewhat  diluted 
form  the  same  doctrine  appears  in  Wagner  {Gruvdlegung,  second  edition,  p.  600), 
who  makes  a distinction  between  goods  in  which  the  peculiarities  of  capital  are 
inherent,  and  those  in  which  they  are  not.  The  former  are  not,  at  least  “ directly.” 
objects  of  saving.  Similarly  Kleinwachter  (Schbnberg’s  Handbuch,  first  edition, 
p.  173).  * Lassalle. 


120 


POSSIBLE  OBJECTIONS 


BOOK  II 


not  been  saved,  but  built.  But  in  order  to  build  them. 
men  had  previously  to  withdraw  the  productive  powers 
necessary  to  building  them  from  the  service  of  the  present ; 

they  had,  therefore,  in  the  strictest  sense  of . the  term,  to 
save  them.^ 

It  may  serve  towards  the  settling  of  this  controversy  to 
remark  that  the  idea  of  sacrifice,  of  renunciation,  and  thus  of 
moral  desert,  need  not  be  associated  with  the  conception  of 
saving.^  There  may  be  sacrifice  in  saving,  and  it  may  be 
praiseworthy,  but  not  at  all  necessarily.  A man  with  a small 
income  will,  of  course,  feel  it  a sensible  privation,  and  it  will 
require  strong  self-denial  in  him  to  lay  past  anything ; while 
one  who  has  an  income  of  £100,000,  and  is  content  to  con- 
sume one  half  of  it,  has  little  claim  to  be  considered  a hero  of 
asceticism  because  he  saves  the  other  half  as  capital.  It  is 

/ simply  the  fact  of  a saving  that  is  indispensable  to  tbp.  forma- 
tion of  capital,:  whether  there  is  sacrifice  and  moral  desert  in  it 
or  not  is  all  the  same  to  the  result.  And  it  follows  from  this 
that  the  theoretical  truth,  that  saving  ” is  necessarY  to  the 
formation  of  capital,  cannot  and  must  not  be  used  to  justify. 

'^either  morally  or  socio- politically,  all  and  every  taking  of 


1 In  the  second  edition  of  Schdnberg’s  SarndbucJi  (p.  214)  Kleinwachter  comes 
a long  way  nearer  our  conception  in  assenting  to  it,  as  regards  at  least  one  of 
the  chief  forms  of  capital — tools  of  production.  He  allows  that  the  making  of 
such  tools  “ always  involves,  to  a certain  extent,  the  renunciation  of  an  immediate 
enjoyment,”  because  the  materials  which  are  made  use  of  in  making  the  tools  of 
production  might  have  been  employed  in  making  some  kind  of  consumption 
goods ; and  thus  there  is  no  reason  for  objecting  to  call  such  a renunciation  of 
enjoyment  by  the  name  of  Saving.  But  it  is  different,  he  says,  with  the  materials 
of  production.  Such  things  as  raw  wool,  stone,  and  lime,  etc.,  could  not  in  any 
way  be  objects  of  direct  consumption,  and  so  could  not  be  saved  ; they  must  be 
looked  on,  therefore,  economically  as  products  of  labour  only,  and  not  as  the 
result  of  saving.  In  this  Kleinwachter  is  not  logical.  As  regards  the  tools  of 
production  he,  quite  correctly,  does  not  consider  whether  the  finished  tools  them- 
selves might  have  been  consumed,  but  whether,  by  the  instruments  from  which 
the  tools  were  made,  any  consumption  good  might  have  been  made  ; and  because 
this  is  the  case  he  answers  the  question  as  to  saving  in  the  affirmative.  But  if 
he  had  kept  to  this  line  of  thought  as  regards  the  materials  of  production,  he 
must  have  seen  that,  bv  means  of  the  same  productive  nowera  as  man  uses  to 
quarry  stone,  to  build  a house,  or  obtain  lime  for  mortar,  he  might  have  made 
himself  goods  for  immediate  consumption.. — e.g.  hunted  wild  animals  or  caught 
fish, — and  that  here,  consequently,  on  exactly  the  same  grounds  and  in  exactly 
the  same  way  as  in  the  case  of  tools,  saving  does  come  into  the  question. 

- See  above,  p.  102. 


CHAP.  VI 


SAVING  NOT  SACRIFICE 


121 


interest  This  i.s  another  instance  of  tliat,  p,nnfuain,cr  of  the 
theoretical  with  the  socio-political  problem  of  interest  which  I 
adverted  to  in  another  place  ^ as  having  done  so  much  harm. 
One  side  mixed  up  the  theoretical  doctrine  that  the  formation 
of  capital  must  be  preceded  by  saving,  with  the  moral  judgment 
that  interest  is  justified  as  the  “ reward  of  abstinence,”  and  the 
other  side,  which  saw,  quite  correctly,  that  interest  could  not 
be  justified  in  such  general  terms,  was  misled,  by  the  same 
confusion  of  the  problems,  into  denying  not  only  the  false 
socio-political  deduction  but  the  true  theoretical  premiss. 

If  these  two  problems  are  kept  distinct  it  will  help  us  to 
give  both  parties  their  due.  To  Eodbertus  and  Lassalle  we 
may  grant  at  once  that  saving  need  not  be  moral  heroism,  and 
therefore  is  no  sufficient  socio-political  justification  of  interest ; 
but  we  must  stand  for  the  recognition  of  the  theoretical  truth 
that  the  fact  of  saving  is  in  any  case  required  to  the  formation 

of  capital 

A second  objection  lavs  emphasis  on  the  fact  that,  for  a. 

man  to  be  able  to  accumulate  capital,  he  must  ac/iuire.  mn'ce. 
than  he  uses,  and  draws  the  conclusion  that  it  is  essentially 
the  productmty  of  labour — industriousness  and  not  abstinence 
— to  which  the  formation  of  capital  is  due.  Thus  Eodbertus 
says,  in  so  many  words,  that  if,  in  the  beginnings  of  economic 
development,  an  “ isolated  worker  has  no  time  to  make  a tool 
because  he  must  always  live  from  hand  to  mouth,”  the  blame 
lies  simply  in  the  productivity  of  labour  being  too  small.  If, 
later,  this  producti%T.ty  increases  so  much  that,  say,  eight 
hours’  labour  is  sufficient  to  produce  the  day’s  maintenance, 
then  “ from  the  labour  time,  which  up  till  now  he  had  to  devote 
entirely  to  make  what  was  absolutely  necessary,  he  has  a 
portion  over  for  other  labour,  and  it  is  this  spare  labour  which 
he  is  now  able  to  devote  to  the  making  of  a tool.”  And  from 
this  quite  correct  consideration  Eodbertus  draws  the  conclusiop 
tha,t  it  is  only  the  increasing  of  the  productivity  of  labour,  and 

not  saving,  which  makes  the  p.xi.stencp.  nf  snob  a primary  rapital 
possible.^  And  stiU  more  briefly  and  strongly  does  Klein- 
wachter  give  expression  to*  the  same  idea  when  he  says  : “ He 
who  transfers  a portion,  say  a half,  of  his  revenue  to  the  bank 
is  merely  industrious.  He  might,  for  instance,  by  a five  hours’ 


* Las  KapUal,  p.  242. 


- See  Capital  and  Interest,  p.  3. 


122 


POSSIBLE  OBJECTIONS 


BOOK  II 


day  of  labour  earn  his  bare  maintenance,  and  devote,  say, 
every  afternoon  to  his  recreation  or  enjoyment ; instead  of 
which  the  man  works  ten  hours  a day,  and  regularly  carries 
what  he  earns  in  the  afternoon  to  the  savings-bank.”  ^ 

■J  I think  this  objection  is  very  easUy  met.  Tt  is  simply 
not  correct  to  say  that  the  man  is  “ merely  industrious.”  He 
is  industrious  and  saving.  If  he  were  simply  industrious 
he  would,  every  day,  spend  the  produce  of  the  afternoon’s 
labour,  along  with  the  produce  of  the  forenoon’s  labour,  in 
immediate  enjoyment  of  life.  That  he  does  not  do  so  is 

because  he  is  saving  as  well.  I freely  admit  that  greatei 
industriousness,  causing  a return  far  exceeding  necessary  require- 
ments, and,  similarly,  greater  productivity  of  labour,  very 
much  facilitate  saving,  just  as  I admit  also  that,  without 
acquisition,  saving,  as  weU  as  formation  of  capital,  is  absolutely 
impossible.  But  I must  as  emphatically  claim  recognition  of 
the  fact  that  the  greatest  acquisition  could  not  lead  to  the 
formation  of  capital  if  a portion  of  it  were  not  withdrawn  from 
present  use  and  “ saved.”  Production  and  Saving  form  two 
vicqually  indispensable  conditions  of  the  formation  of  capitaL 

and  it  is  only  dialectical  one-sidedness — which,  unfortunately, 
has  already  played  much  too  great  a part  in  the  doctrine 
of  capital — that  could  deny  the  co-operation  of  either  of 
them.^ 

^ But  does  not  this  involve  me  in  contxarliV.t.inn  with  the 

proposition  so  earnpstly  mnl-pnflpd  fr»r  in  lagt.  nhpptp.r,  that  all 
goods  (and  consequently  all  capital!  proceed  from  two  elements^ 
of  which  saving  is  not  one,  viz.  from  nature  and  labour  ? ® 
Certainly  it  does  not,  It  is  not  my  intention  to  do  as  Senior 

^ Kleinwachter,  in  Schonberg’s  Handhuch,  second  edition,  p.  215. 

* A very  striking  illustration  of  these  words  may  be  found  in  the  already- 
mentioned  utterances  of  Rodbertus  on  the  subject.  On  p.  242,  from  the  fact  that, 
if  the  productivity  of  capital  is  too  small,  there  can  be  no  saving  and  no  forma- 
tion of  capita],  he  contents  himself  with  drawing  the  quite  correct  conclusion 
that  “ necessarily  some  other  element  besides  saving  must  intervene.”  Thus  he 
ascribes  to  saving  its  proper  place,  as  not  sufficient  by  itself,  but.^  all  the  same,  as_ 
a facUir^  of  the  formation  of  capital.  It  is  only  on  p.  243  that  the  fact  of  a 
certain  degree  of  productivity  of  labour  being  indispensable  is  dialectically 
changed  into  the  statement  that  only  the  increase  of  productivity,  and  not  saving, 
makes  the  formation  of  capital  possible. 

® A similar  objection  was  urged  by  the  old  economist  Lauderdale  against  the 
Saving  theory,  Inquiry,  pp.  207,  272. 


CHAP,  VI 


IS  SA  VING  PUREL  Y NEGA  TIVEf 


123 


did/  and  try  to  make  Saving  a third  factor  in  production 
along  with  Nature  and  Labour.  Tt  does  not  stand  beside  these 
factors,  but  behind  them.  It  does  not  share  with  them  in 
the  work  of  production  in  such  a way  that  any  part  of  the 
same  is  due  to  it  solely  and  peculiarly ; it  only  effects  that  the 
productive  powers,  nature  and  labour,  which  in  any  case  must 
do  the  whole  work  of  production,  are  directed  straight  to  this 
and  no  other  goal — the  production  of  capital  and  not  of  con- 
sumption goods.  In  a word,  it  has  its  nlace.  not  among  tl^ 
means  of  production,  but  among  the  motives  of  production- — 

the  motives  which  decide  the  direction  of  productiom  The 
proposition,  then,  that  nature  and  labour  are  the  only  true 
productive  powers,  can  stand  perfectly  well  beside  the  wider 
assertion,  that,  if  capital  is  to  come  into  existence  at  all,  there 
must,  first,  hp.  certain,  intp.llop.tual  dispositions  through  which 
renunciation  is  made  of  a portion  of  the  immediate  consump- 
tion that  is  otherwise  possible ; in  other  words,  there  must  be 
“ Saving.” 

Saving,  it  is  objected  again,  is  a “non -consumption ” — 
something  purely  negative : and  a pure  negation  can  bring 
forth  nothing.^  To  my  mind  there  is  more  dialectic  than  truth 
in  tins  argument.  Is  it  quite  correct  to  say  that  saving  is  some- 
thing purely  negative  ? How  comes  it,  then,  that,  although 
nothing  is  easier  than  a “ pure  not-doing,”  so  many  people  feel 
saving  an  uncommonly  difficult  and  disagreeable  thing  ? In 
truth,  saving  is  a mental  business ; and  often,  indeed,  though 

^ Political  Economy,  third  edition,  p.  57,  where  three  great  agents  or  in- 
struments of  production  are  distinguished  — LahfliiL,— J!Iat»iaL_AgentSj_an^ 
Abstinence. 

^ Marx,  Bos  Kapital,  second  edition,  i.  p.  61 9,  in  note  (English  translation, 
p.  608) : “It  has  never  occurred  to  the  vulgar  economist  to  make  the  simple 
reflection,  that  every  human  action  may  be  viewed  as  ‘ abstinence  from  its 
opposite^  Eating  is  abstinence  from  fasting,  walking  abstinence  from  standing 
stUl,  working  abstinence  from  idling,  idling  abstinence  from  working,  etc. 
These  gentlemen  would  do  well  to  ponder,  once  in  a way,  over  Spinoza’s  Deter- 
mxtwiio  est  Negatio.”  Gide,  Prindpes  d'ie.  Pol.  p.  168:  “Un  act  purement 
negatif,  une  abstention  ne  saurait  produire  quoi  que  ce  soit.  . . . Sans  doute  on 
pent  dire  que  si  ces  richesses  avaient  ete  consommees  au  fur,  et  a mesure  qu’elles 
ont  pris  naissance,  elles  n’existeraient  pas  k cette  heure,  et  qu’en  consequence 
Tepargne  les  a fait  naitre  une  seconde  fois.  Mais  k ce  compte,  il  faudrait  dire 
qu’on  produit  une  chose  toutes  les  fois  qu’on  s’ahstient  d’y  toucher  et  la  non 
destruction  devrait  etre  classes  parmi  les  causes  de  la  production,  ce  oui  serait 

une  singuliere  logique.” 


124 


POSSIBLE  OBJECTIONS 


BOOK  II 


not  always,  a veiy  troublesome  mental  business,  preceded  by 
long  deliberation  and  conflict  between  contending  motives. 
This,  of  course,  does  not  constitute  an  act  of  production,  and 
the  representatives  of  the  above  dialectical  objection  are, 
in  the  end,  quite  right  in  raising  it  as  an  argument  against 
those  theorists  who  would  dignify  saving  by  the  name  of  a third 
factor  in  production.  But,  indeed,  simply  mental  a,s  sa,ving 
may  be.  it  is.  siifRm'p.nt  to  effect, nally^-filL  I.Vip.  rnip  which  wp, 
have  assigned  to  it  in  the  formation  of  capital,  viz.  exerting 
an  influence  on  the  direction  of  production. 

For  the  rest,  whether  it  be  a “ pure  negation  ” or  not,  we 
can,  in  no  case,  allow  dialectical  considerations  to  interfere  with 
establishing  important  scientific  facts.  And  it  is  an  import- 
ant scientific  fact,  which  must  be  reiterated  all  the  more 
emphatically  that  it  has  been  disputed,  that  the  progress  of 
capital  stands  in  a causal  relation  with  the  extension  of  the 
immediate  claims  put  forward  by  individuals  and  peoples. 

Whatever  body — be  it  an  individual  or  a people — extends  the 
claims  of  the  moment  so  far  as  to  exhaust,  during  the  current 
period,  the  entire  amount  of  consumption  goods  which  its 
income  makes  possible  for  the  current  period,  can  neither 
make  new  nor  increase  old  capital ; and  this  fact  finds  accurate 
and  straightforward  expression  in  the  proposition  that  saving 
is  an  indispensable  condition  of  the  formation  of  capital.^ 

Suppose  now  that  we  have  succeeded,  after  considerable 
trouble,  in  establishing  the  proposition  that  capital  comes  into 
existence  through  saving  and  devotion  to  production  of  what  is 
saved,  we  have  still  got  but  half  the  answer  to  our  inquiry  as 
to  the  formation  of  capital.  We  have  now  to  face  the  further 
question : Dn  what  does  it  depend  that  people  can,  will,  and, 
^actually  do  save  and  produce  intermediate  products  ? Strictly 
speaking,  this  second  question  is  the  more  important  of  the 
two ; it  noints  to  the  impelling  and  working  forces  in  th,g, 
formation  of  capitaL  while  all  that  has  preceded  has  merely 
laid  down  the  external  forms  of  the  process. 

^ I will  not,  g 'priori,  deny  that  possibly  one  miglit  contrive  to  hunt  up  some 

subtle  examples  whars  rapital  Tpartip-nlarly  social  capital!  comes  into  existence 

without  saTinpf  properly  so  called.  But  all  the  more  strongly  do  I hold  by  my 
proposition  that,  as  regards  the  great  mass  of  the  economic  formation  of  capital, 
saving,  in  the  way  I have  indicated,  has  its  place. 


CHAP.  VI 


TRANSITION  TO  VALUE 


T25 


The  most  general  answer,  but  still,  it  must  be  confessed 


insufficient  for  all  its  generality,  runs  thus  : what  people  look, 
to  in  economic  life  is  the  Value  of  goods.  Here  we  touch  a 
subject  which  is  too  important  and  too  difficult  to  be  spoken 
of  merely  in  passing.  To  obtain  the  basis  for  the  principal 
part  of  our  work — the  explanation  of  interest — we  require 
to  go  into  the  theory  of  value.  I shall,  therefore,  leave  the 
theory  of  the  formation  of  capital  at  this  stage,  returning  to  it 
shortly  in  the  last  chapter,  where  we  shall  give  it  the  logical 
conclusion  that  it  still  lacks, 


BOOK  III 


VALUE 


CHAPTEE  I 


THE  TWO  CONCEPTIONS  OE  VALUE  ^ 

In  the  science  of  Political  Economy,  as  in  ordinary  speech,  two 
very  di.stinot  things  have  usually  been  p,1a.ssp.d  tngethp.r  nndor 

the  one  name  of  Yalue.  From  the  first  it  could  scarcely  escape 
notice  that  there  was  a difference  between  them,  but  the  full 
extent  of  the  difference  was  certainly  underrated.  Instead  of 
being  recognised  as  phenomena  belonging  to  entirely  distinet 
categories  of  thought,  they  were,  quite  falsely,  represented  as 
members  of  one  and  the  same  group  of  phenomena,  and,  under 
the  not  very  felicitous  names  of  Use  Value  and  Exchange 
Yalue.  they  were  assumed  to  be  .<^ub-.qpepies  of._nTie  imiver^ 

^ My  views  on  the  subject  of  Valae  have  already  been  published  at  lene-tli 
in  another  place  {Grundziiae  der  Theorie  des  WirthschaftlKhen  Outerwcrths,  in 
Conrad’s  Jahrhucher  filr  NationalokoTiomie  und  Statistik,  vol.  xiii.  1886,  pp. 
1-86  and  477-541).  Since  then  I have  seen  no  reason  to  change  them.  What  I 
have  now  to  say  on  the  same  subject  can,  therefore,  offer  but  few  new  features. 
On  the  whole,  what  follows  is  an  extract  from  my  former  work  adapted  to  the 

requirements  of  the  theory  of  capital,  and,  in  the  composition  of  it,  I have  gone 
on  principles  suggested  by  the  nature  of  my  present  task.  Those  fundamental 
ideas  on  which  the  understanding  of  the  whole  depends,  and  those  lines  of  thought 
with  which  the  theory  of  capital  is  specially  connected,  I have  taken  in  all  their 
detail  from  my  other  book  ; and,  as  a simple  change  of  form  would  have  been  as 
troublesome  as  it  was  useless,  I have  taken  them,  for  the  most  part,  without 
change.  T have  omitted,  on  the  other  hand,  ail  those  explications,  demonstra- 
tions, and  so  on,  which  were  important  for  the  Value  theory,  but  seemed  not 
altogether  indispensable  for  the  understanding  of  the  theory  of  Capital.  In  place 
of  these  I have  added  a good  deal  of  matter  in  which  I have  taken  advantage  of 
the  newest  literature  on  the  subject,  and  have  tried  to  give  a still  clearer  formula- 
tion to  several  ideas,  and,  particularly,  to  develop  with  more  exactitude  special 
points  where  the  value  theory  comes  into  more  intimate  connection  with  the 
theory  of  capital.  The  most  important  additions  occur  in  chapter  vii.  of  the 
present  book,  and  at  the  end  of  chapter  v.  and  in  chapter  vii.  of  the  next  book. 

Readers  who  are  interested  in  the  theory  of  value  and  price  for  its  own  sake,  I 
should  ask  to  consult  the  statement  in  Conrad’s  Jahrbiieher,  which  is  much  more 
complete,  and  which  I tried  to  make  easier  by  numerous  references. 

K 


130 


THE  TWO  CONCEPTIONS  OF  VALUE  book  in 


conception  of  Value,  and  distinguished  from  each  other  as  such. 
This  distinction  once  made,  however,  the  so-called  Use  Value 
was  almost  entirely  dropped  out  of  sight.  Economists  took  no 
trouble  to  inquire  any  deeper  into  its  nature,  nor  did  they 
make  any  use  of  it  in  further  investigations-  They  simply 
catalogued  it,  as  it  were,  among  the  conceptions  of  political 
economy,  and  left  it  lying  in  a corner  of  their  systems  like  a 
stone  for  which  there  was  no  use.  It  is  only  of  very  recent  da^ 
that  economical  investigation  has  disco vefed~~in  this  "stone~re-. 

iected  of  the  builders  ” the  basis  and  support  of  one  of  the  most 

important  conceptions  of  economics,  and  has  awaked  to  tlTe^fact 
that  on  it  depends  a group  of  most  notable  laws — laws  with 
consequences  reaching  far  beyond  the  boundaries  of  the  theory 
of  value,  and  laws  to  which  almost  every  branch  of  economic 
theory  must  go  back  for  its  root  and  spring. 

But,  first  of  all,  it  is  important  that  we  give  right  names 
to  those  things  which  tradition  has  handed  down  to  us  under 
the  inadequate  designations  of  Use  Value  and  Exchange  Value. 
The  two  groups  of  phenomena,  to  both  of  which  popular  usage 
has  given  the  ambiguous  name  Value,”  we  shall  distinguish 
as  value  in  the  Subjective  and  value  in  the  Objective  sense.^ 

/ Value  in  the  Subjective  sense  is  the  importanop.  which  r. 
r^ood.  or  a complex  of  goods,  possesses  ^^th  regard  to  the  welL- 

1 being  of  a subject.  In  this  sense  I should  say  of  any  par- 

ticular good  that  it  was  valuable  to  me,  if  I recognised  that  my 
wellbeing  was  so  associated  with  it  that  the  possession  of  it 
/ .satisfied  .some  want,  secured  me  a gratification  or  a feeling 
)of  pleasure  which  I should  not  have  had  without  it,  or  saved 
/me  from  a pain  which,  otherwise,  I should  have  had  to  endure. 
In  eYTt^teuee  of  the  good  means  mv  gain,  thfi. 

absence  of  it  mv  loss,  in  wellbeing : to  me  it  is  a matter  of 
importance,  for  me  it  has  value. 

By  Objective  value,  on  the  other  hand,  is  meant  the  Power 

or  Capacity  of  a good  to  procure  some  one  objective  result.  In 
this  sense  there  are  as  many  kinds  of  value  as  there  are  external 
results  with  which  man  may  be  connected.  There  is  a nutritive 

1 I frankly  confess  that  I would  gladly  exchange  these  pedantic  and  clumsy  ex- 
pressions for  terms  more  euphonious  and  popular,  if  they  could  be  got  to  indicate 
the  opposition  referred  to  with  even  approximate  correctness.*  But  I have  not  been 
able  to  find  such  expressions.  The  words  Use  Value  and  Exchange  Value  are  nol 
■suitable  at  all,  because,  as  we  shall  see,  there  js  a Subjectiyfl  .exchange  value. 


CHAP.  I 


SUBJECTIVE  AND  OBJECTIVE 


131 


value  of  food,  a heating  value  of  wood  and  coal,  a fertilising 
value  of  manures,  a blasting  value  of  explosives,  and  so  on.  In 
any  expressions  of  this  kind  all  reference  to  the  wellbeing  or 

illbeing  of  a subject  is  excluded  from  the  conception  of  va.hif;. 
If  we  affirm  that  beech  has  a superior  heating  value  over  pine, 
we  only  express  the  purely  objective  and,  as  it  were,  mechanical 
fact  that  with  a definite  weight  of  beech  a greater  amount  of 
heat  can  be  raised  than  with  the  same  weight  of  pine.  In  the 
above  connections,  then,  instpad  of  thp.  word  " Value  ” we  use, 
as  entirely  synonymous  with  it,  the  expressions  “Power”  nr 
“ Capacity  ” — expressions  which  themselves  suggest  a purely 
objective  relation.  Instead  of  “ nutritive  value,”  “ heat  value,” 
" explosive  value,”  we  use  “ nutritive  power  ” or  “ nutritive 
capacity,”  “ heating  power,”  “ explosive  power,”  and  so  on,  as 
meaning  exactly  the  same  thing. 

The  varieties  of  Objp.rtive  value  iust  mentioned  bv  wav  of 

illustration  do  not,  however,  belong  to  economical  but  to  purely: 
^.bnipa.l  rph  tinns ; and,  however  frequently  they  are  referred 
to  in  economical  text-books,  they  do  not  properly  belong  to 
political  economy  at  all.  It  does  not  fall  within  the  province 
of  our  science  to  expound  the  heating  value  of  wood,  nor,  in 
explaining  other  economical  phenomena,  has  it  occasion  to  lay 
stress  on  this  heating  value  any  more  than  it  does  on  any  other 
physical  or  technical  fact.  I have  given  these  illustrations 
purely  as  illustrations,  with  the  intention  of  putting  in  clearer 
relief  the  very  intimately  related  nature  with  the  above  of  that 
branch  of  objective  values  which,  of  'course,  has  the  greatest 
possible  importance  for  political  economy,  namely,  the  objective 
Exchange  value  of  goods.  By  this  expression  B’^nean  the 
oi^ective  worth  of  goods  in  excEahTOT“br.  in  other  words,  the 

pr>ssTbT]ifry' nr  nbtaiin'ng  jn  PYP.bapgp.  fnr  thprir^  . q . 
other  ecQiioini'car  goc^s.This  possibility  bping  looked.- aipon  as 
a power  or  a property  of  the  former  goods.  In  this  sense  we 
say  that  a horse'ls  worth  £50,  or  a house  worth  £1000,  if,  in 
exchange  for  these,  we  can  obtain,  respectively,  £50  or  £1000. 

Here,  again,  it  must  be  noted  that,  as  in  the  kindred 
expressions  heating  value  and  the  like,  we  say  nothing  at,  all 
as  to  the  influence  which  goods  mav  exert  on  the,  wellbeing  of 

any  subject  wha^iver ; we  simply  indicate  the  objective  relation 
that  for  a particular  good  a certain  amount  of  other  goods  may 


132 


THE  TWO  CONCEPTIONS  OF  VALUE  book  hi 


be  had  in  exchange.  In  this  case  also  the  characteristic 
phenomenon  recurs,  that  thp  word  “ Value  ca,n  be.  gm'tp. 
adequately,  replaced  by_the  word. “Power”  and  is,  indeed,  so 
replaced  in  popular  speech.  Besides  the  expression  “value 
in  exchange”  English  economists  use,  quite  indifferently,  the 
expression  “purchasing  power,”  and  we  Germans  are  beginning 
in  the  same  way  to  put  in  general  use  the  term  Tauschkraft. 

The  economical  theory  of  value  has,  then,  the  double  task 
of  interpreting,  on  the  one  hand,  the  laws  of  Subjective  Value, 
a^nd,  on  the  other,  the  laws  of  Objective  Exchange  Value,  as 

from  the  economic  , point  ..  of  view  by  far  the  mpst  important 
branch  of  objective  value.  The  first  part  of  this  task  we 
shall  take  up  in  the  present  book,  the  second  in  the  follow- 
ing book  deaHng  with  the  theory  of  Price.  It  is  true  that 
the  two  conceptions,  “ Price  ” and  “ Exchange  Value,”  are  by 
no  means  identical.  Exchange  Value  is  the  capacity  of  a 
good  to  obtain  in  exchange  a quantity  of  other  goods.  Price 
is  that  other  quantity  of  goods.  But  the  laws  of  these  two 
coincide.  So  far  as  the  law  of  price  explains  that  a good 
actually  obtains  such  and  such  a price,  and  why  it  obtains  it, 
it  affords  at  the  same  time  the  explanation  that  the  good  is 
capable,  and  why  it  is  capable,  of  obtaining  a definite  price. 
The  law  of  Price,  in  fact,  contains  the  law  of  Exchange  Value.^ 

1 The,  foundations  of  the  modern  value  theory  have  been  laid  by  three  writers 

whose  work  is  in  substantial  agreement — Carl  Menger.  Jevons,  anil  Walras.  Of 
these,  in  clearness  and  completeness,  Menger's  Ttat’ement  takes  the  first  place. 
Twenty  years  before  his  time,  several  of  the  most  weighty  and  fundamental  ideas 
had  been  already  propounded  by  Gossen  in  his  remarkable  book,  Entwicklung 
der  Gesetze  des  menschlichen  Verkehrs  und  der  daraus  Jliessenden  Begeln  fur 
menschliches  Handeln,  Brunswick,  1854.  Like  the  book  itself,  these  ideas  sank 
into  complete  but  undeserved  oblivion,  and  had  to  be  rediscovered  by  the 
economists  just  mentioned.  That  this  was  done  almost  simultanp-oiisly  by 
difFerent  men,  belonging  to  three  different  nations,  and  quite  independently  of 
each  other,  is  a very  remarkable  coincidence,  and  is,  at  the  same  time,  no 
small  guarantee  for  the  correctness  of  the  principles  on  which  all  three  were 
certainly  agreed,  although  in  thoroughness  their  statement  of  them  was  unequal. 
Since  then  these  principles  have  had  a notable  development,  and  received  wide 
acceptance.  Not  long  ago,  in  the  preface  to  his  Theorie  de  la  Mcmnaie  (Lausanne, 
1886),  Walras  could  give  an  imposing  list  of  writers  as  adherents  of  the  new 
theory.  Since  then  we  may  add  the  name  of  E.  Sax  {Grundlegung  der  fheo- 
retischcn  Staatswirthschgft,  Vienna,  1887,  p.  250), — with  whom,  however,  I cannot 
agree  in  many  particulars,  particularly  in  those  where  he  tries  to  establish  original 
ideas  that  are  not  in  harmony  with  those  of  his  predecessors ; and  that  of  R. 
Meyer  {Das  Wesen  des  Einkommens,  Berlin,  1887). 


CHAPTEE  II 


NATURE  AND  ORIGIN  OF  SUBJECTIVE  VALUE 

All  goods  without  exception — indeed  according  to  the  very 
conception  of  them  as  “ good  ” — possess  a certain  relation  to 
human  wellbeing.  There  are,  however.  twiL,esseatiaIlw  distinct 
grades  of  this  relation.  A goodUbilrags  to  the  lower  grade, 
whenTl^ssesses  the  general  capacity  to  snhsprvft  human  wpal 
The  higher  grade,  on  the  other  hand,  demands  that  a good 
should  be  more  than  merely  a sufficient  cause ; it  mu.st  he  an 
indispensable  condition  of  human  wellbeing — a condition  of 
such  a kind  that  some  gratification  stands  or  falls  with  the 
having  or  wanting  of  the  good.  In  the  expressive  vocabulary 
of  everyday  Life  we  find  a separate  designation  for  these  grades. 
The  lower  is  called  Usefulness,  the  higher  Value.  This  dis- 
tinction, already  recognised  in  common  speech,  we  must  try  to 
make  as  clear  and  well-marked  as  its  fundamental  importance 
for  the  whole  theory  of  value  deserves. 

A man  dwells  beside  a bubbling  spring  of  water.  He 
has  filled  his  cup,-  and  the  spring  goes  on  pouring  out  enough 
to  fill  a hundred  other  cups  every  minute.  Another  man  is 
travelling  in  thejieseifi  A long  day’s  journey  over  glowing 
sand  still  divides  him  from  the  nearest  oasis,  and  he  has 
come  to  his  last  cup  of  water.  What  is  the  relation  in 
each  case  between  the  cup  of  water  and  the  wellbeing  of, 

its  owner.? 

A single  glance  shows  us  that  the  relation  is  very  dis- 
similar ; but  wherein  lies  the  difference  ? Simply  tha,t,  in  tlie 
former  case,  we  haA'^e  only  the  lower  grade  of  the  relation  we 
call  wellheingr  that  ~ of  usefulness  ; in  the  latter  case  we  ha^’e 
the  higher" ~^a'iTe~a!s  well.  In  the  first  ca^'  “jtist  as  in  the 


134 


NATURE  OF  SUBJECTIVE  VALUE 


BOOK  in 


second,  the  cup  of  water  is.  aseful,  that  is,  capable  of  satisfying 
a~~Want7  and,  moreover,  in  exactly  the  same  degree ; for 
evidently  the  refreshing  qualities  of  the  water — the  qualities 
on  which  its  capacity  to  quench  thirst  is  based,  such  as  cool- 
ness, taste,  etc. — are  not  in  the  least  degree  weakened  by  the 
fact  that  other  cups  of  water  chance  to  possess  similar 
properties ; nor,  in  the  second  case,  are  these  refreshing 
qualities  in  the  least  augmented  by  the  accidental  circum- 
stance that  there  is  no  other  water  near.  On  the  other 
hand,  the  two  cases  become  essentially  distinct  when  con- 
sidered with  reference  to  the  second  grade.  Looking  at  the 
former  case  we  must  say  that  the  possession  of  the  cup  of 
water  does  not  provide  the  man  with  one  single  satisfaction 
more,  nor  its  loss  with  one  satisfaction  less,  than  he  could 
have  obtained  without  it.  If  he  has  that  particular  cup  of 
water  he  can  quench  his  thirst  with  it ; if  he  has  not  that  cup 
— well,  he  can  quench  his  thirst  quite  as  well  with  one  of  the 
hundred  others  which  the  spring  puts  freely  at  his  disposal 
every  minute  of  the  day.  Tfjie  likes,  therefore,  he  may  make 
that  one  cun  the  cause,  of  his  s^atisfactidn  'b;^que'nching  his 

thir.st  with  it:  an  indispensable  condition  of  his  satisfaction  it 
cannot  be  : for  his  wellbeing  it  is  dispensable,  unimportant, 
indifferent. 

It  is  quite  otherwise  in  the  second  case.  Here  we  must 
say  that,  if  our  traveller  had  not  that  one  last  cup,  he  could 
not  quench  his  thirst ; he  must  bear  its  pangs  imassuaged, 
perhaps  even  succumb  to  them.  In  the  cup  of  water  then,  in 
this  case,  we  see  not  merely  a sufficient  cause,  but  the  indis- 
pensable condition,  the  sine,  qua  non  of  human  wellbeing.  Here 
it  is  of  consequence,  even  of  urgency ; it  possesses  importance 
for  his  wellbeing. 

Now  it  is  not  too  much  to  sav  that  the  distinction  here 
drawn  is  one  of  the  most  fruitful  and  fundamentaLin  the 
whole  range  of  our  science.  It  does  not  owe  its  existence  to 
the  microscope  nor  to  any  hair-splitting  distinctions  of  the 
logician.  It  has  its  life  in  the  world  of  men,  who  know  it 
and  use  it  and  take  it  as  guide  for  their  common  attitude 
towards  the  world  of  goods,  not  only  as  regards  the  intellectual 
estimate  they  apply  to  these  goods,  but  as  regards  their 
actual  business  transactions.  About  goods  _which  are  only: 


CHAP.  II 


THE  INDISPENSABLE  CONDITION 


135 


useful  the  practical  businR-^ss  man  i.g  carpi hss  and  indifferent. 

The  academic  knowledge  that  a good  may  be  “ of  use  ” cannot 
evoke  any  efficient  interest  in  the  good,  in  face  of  the  other 
knowledge  that  the  same  use  may  be  obtained  without  it. 
Such  goods  are  practically  naught  as  regards  our  wellbeing. 

and  we  treat  them  as  such ; we  are  not  put  about  when  we 
lose  them,  and  we  make  no  effort  to  gain  them.  Who  would 
fret  at,  or  make  an  effort  to  prevent,  the  spilling  of  a cup  of 
water  at  the  spring,  or  the  escape  of  a cubic  foot  of  atmo- 
spheric air  ? WTiere^  on  the  other  hand,  the  sharpened  glance 
of  the  economic  man  recognises  that  some  sati.qfaction.  well- 

being. gratification.  ^ connected  with  a particular  good,  there 
the  effective  interest  whi^’k  -are  tak^  in  own  -wellbeing  is, 
transfefred  to  the  good  which  we  recognise  as  its  condition : 

we  see  and  value  our  own  welfare  in  it ; we  recognise  its 
importance  for  us  as  value ; and  finally,  we  develop  an 
anxiety,  proportioned  to  the  greatness  of  that  importance,  to 
acquire  and  hold  the  good. 

Thus,  formally!  defined,  value  is  the  importance  which  a 

good  or  complex  of  goods  possesses  with  respect  to  the  wflUbping* 
of  a subject.  Any  addition  to  this  definition,  regarding  the 
kind  and  reason  of  the  importance,  is,  strictly  speaking,  not 
necessary,  since  goods  can  only  have  an  effective  importance 
for  human  wellbeing  in  one  way,  viz  ^y  the  in dispen .sable 

condition,  the  sine  qua  non,  of  some  one  utility  which  sub- 
serves it.  In  view  of  the  fact,  however,  that  in  other  defini- 
tions of  value  it  is  very  often  translated  as  an  “ importance,” 
while  the  importance  spoken  of  rests,  erroneously,  on  a simple 
capability  of  utility,  or,  not  less  erroneously,  on  the  necessity 
of  expenditure  of  costs,  or  the  like,^  we  shall  define  it,  un- 
ambiguously and  exactly,  as : That  importance  which  goods  or 
complexes  of  gooiks.  jicgnire.  as  the  r^ognised "condition  of  a 

utility  which  makes  for  the  wellbeing  of  a subject,  and  would, 

not  ~be  obtained  without  them. 

All  gnnd.s  bavp.  usefulness,  but  all  goods  have  not  value. 

For  the  emergence  of  value  there  must  be^  scarcity  as  well  as 
usefulness — not  absolute  scarcity,  but  scarcity  relative  to  the 
demand  for  the  particular  class  of  goods.  To  put  it  more 

^ See  Conrad’s  Jahrhiicher,  vol.  xiii.  p.  11. 


136 


NATURE  OF  SUBJECTIVE  VALUE 


BOOK  III 


exactly : goods  acquire  value  when  the  whole  available  stock 
of  them  is  not  sufficient  to  cover  the  wants  depending  on 

them  for  satisfaction,  or  wlien  the  stneic  would  not  he  silfiReieot 
^ without  these  particular  goods.  Ou  the  other  hand,  those 
■ goods  remain  valueless  which  are  offered  in  such  superfluity 
that  all  the  wants  which  they  are  fitted  to  satisfy  are  com- 
pletely supplied,  and  when,  beyond  that,  there  is  a surplus 
which  can  find  no  further  employment  in  the  satisfaction  of 
want,  and  which,  at  the  same  time,  is  large  enough  to  spare 
the  goods  or  quantities  of  goods  that  we  are  valuing  without 
imperilling  the  satisfaction  of  any  one  want. 

After  what  has  been  said  as  to  the  nature  of  value,  it 
should  not  be  very  difficult  to  prove  these  propositions.  When 
the  supply  of  goods  is  not  sufficient,  and  some  of  the  wants 
which  they  are  adapted  to  satisfy  must  remain  un.satisfied.  it  is 
clear  that  the  loss  of  even  a single  good  involves  the  loss  of  a, 

possible  satisfaction,  while  the  addition  of  a single  good  in- 
volves the  acquisition  of  a satisfaction  otherwise  impossible ; 
and  it  is  clear,  consequently,  that  some  gratification  or  form  of 
wellbeing  depends  on  the  existence  of  that  good.  Conversely, 
it  is  quite  as  clear  that,  if  goods  of  any  class  are  to  be  had  in 
superfluity,  there  is  no  harm  done  if  one  of  the  goods  be  lost — 
since  it  can  be  immediately  replaced  from  the  superfluous 
stock ; nor  any  utilitv  got  if  another  such  good  be  added — 
since  it  cannot  be  employed  in.  fl.ny  useful  way.  Suppose,  for 
instance,  that  a peasant  requires  ten  gallons  of  water  per  day, 
and  no  more,  for  general  purposes — say,  for  his  own  drinking, 
for  that  of  his  family  and  servants,  for  watering  his  cattle,  for 
cleansing,  flushing,  etc. — and  suppose  that  the  only  spring  within 
reach  supplies  no  more  than  eight  gallons  a day.  It  is  quite 
evident  that  he  cannot  spare  one  single  gallon  from  his  waters 
supply  without  suffering,  to  a more  or  less  sensible  extent, 
as  regards  the  wants  and  aims  of  his  economy.  Every  gallon 
in  this  case  is  the  Condition  of  a definite  sphere  of  usefulness. 
Even  if  the  spring  supplied  just  ten  gallons  this  would  still  be 
true  But  if  the  spring  supplied  twenty  gallons  per  day,  it  is 
just  as  obvious  that  the  loss  of  one  gallon  would  not  do  the 
slightest  injury  to  our  peasant  He  can  only  employ  ten 
gallons  usefully,  and  he  must  let  the  other  ten  gallons  flow 
away  unused.  If  one  gallon  is  spilled  it  is  replaced  from  the 


CHAP.  II  ONLY  ECONOMICAL  GOODS  HAVE  VALUE 


137 


overflow,  and  the  only  effect  is  that  now  the  unusable  surplus 
is  reduced  from  ten  gallons  to  nine. 

Now'  as  it  is  the  insufficient,  or  the  barely  sufficient, 
goods  that  are  the  objects  of  economical  care — the  goods  we 
“ economise  ” or  endeavour  to  acquire  and  keep, — while  such 
goods  as  are  to  be  had  in  superfluity  are  free  to  everybody, 
we  may  express  the  above  propositions  shortly  in  the  following 
form:  AH  economical  goods  have  value ; all  free  goods  are 
valueless.^  In  any  case  it  must  steadily  be  borne  in  mind 
that  it  is  only  relations  of  quantity  that  decide  whether  any 
particular  good  is  merely  capahle  nf  nsc  or  is  also  the  con- 
dition of  a utditv  for  us.^ 

1 Some  very  interesting  phenomena  of  value  may,  in  certain  circnmstances. 

be  exhibited  by  free  ^ooda  also.  For  the  explanation  of  this  see  my  Qrundziige, 
p.  15. 

^ Those  numerous  writers  of  whom  Scharling  is  the  latest  instance  (Conrad’s 
Jdhrhucher,  vol.  xvi.  pp.  417  and  513,  and  particularly  424,  430,  551),  who  say 
that  the  distinguishing  criterion  of  “economical”  and  “valuable”  goods  is 
difficulty  of  attainment,  the  necessity  of  expending  labour,  and  the  like.  ar£. 
giving  a secondary  ground  of  definition  instead  of  the  really  decisive  and 
primary  one.  It  is  only  when  and  because  we  are  suffering,  or  fear  to  suffer,  loss 
of  satisfaction  from  insufficient  supply  of  goods  that  we  decide,  generally  speak- 
ing, to  submit  to  the  hardships  of  acquiring  them,  to  labour,  and  so  on.  Ltb^iv 
and  hardship  could  not  by  themselves  confer  an  economical  character  on  grinds 

were  it  not  that,  for  the  most  part,  another  circumstance,  and  that  the  really 
decisive  one,  is  also  present ; in  other  words,  that  those  kinds  of  goods,  which 
are  difficult  or  troublesome  to  obtain,  are,  at  the  same  time,  the  goods  that 

remain  scarce.  That,  however,  it  is  not  the,  diffii^nlty  but:  tb^  scarcity  that 
decides  is  vividly  shown  in  those  cases — not,  I grant,  very  common — where  the 
technical  circumstances  are  of  such  a nature  that  the  good  can  be  got  only,  indeed, 
by  conquering  difficulties,  but  then  in  superfluous  amount.  When  the  peasant 
obtains  good  drinking  water,  e.g.,  by  bringing  it  along  a pipe  to  a house,  it  may 
occasion  him  a permanent  expenditure  of  labour  and  costs  for  construction, 
upkeep,  and  management  of  the  water-.supply.  But  if  this  brings  the  water  in 
greater  quantity  than  he  requires,  it  will  not  occur  to  the  peasant,  in  spite  of  the 
labour,  that  he  must  “economise”  the  water. 


CHAPTER  III 


THE  AMOUNT  OF  VALUE 


In  asking  what  is  the  principle  that  reflates  the  amount  of 

value,  we  pass  fco  a sphere  where  lies  the  chief  taaV  of  a.  t.hftnry 

of  value,  and  where  at  the  same  time  lie  its  greatest  difficulties. 

These  difficulties  are  the  result  of  a peculiar  coincidence  of 
circumstances.  Erom  one  point  of  view  the  true  principle 
almost  suggests  itself.  If  the  value  of  a good  is  its  importance 
to  human  wellbeing,  and  if  this  “ importance  ” means  that  some 
portion  of  our  wellbeing  is  dependent  on  our  having  the  good, 
it  is  clear  that  the  amount  of  the  good’.ci  value  must  he 
determined  by  th^  amount  of  wellbeing  which  depends  on  it. 
l^^^^-^oods  will  have  high  value  if  our  wellbeing  depends  on  them 
to  any  important  extent,  low  value  if  it  does  not. 

But  from  another  point  of  view,  there  are  certain  facts  in 
the  economical  world  which  seem  to  give  the  lie  to  this  very 

simple  and  natural  explanation.  Everybody  knows  that,  in 
practical  economic  life,  precious  stones  possess  a high  value, 
while  bread  and  iron  have  a moderate  value,  and  air  and  water 
usually  no  value  at  all.  Now  everybody  knows  that  without 
air  and  water  we  simply  could  not  exist,  and  that  the  uses  of 
bread  and  iron  are  extremely  important,  while  precious  stones, 
for  the  most  part,  only  satisfy  the  love  of  ornament,  and  have, 
accordingly,  a very  inferior  importance  for  human  wellbeing.  It 
would  appear,  then,  that  one  who  holds  fast  by  the  principle  that 
the  amount  of  a good’s  value  is  determined  by  the  importance 
of  the  services  which  it  may  render  to  human  wellbeing,  must 
expect  to  find  in  precious  stones  a low  value,  in  bread  and  iron 
a high  value,  and  in  water  and  light  the  very  highest  value. 
But  facts  show  that  exactly  the  opposite  of  thig  is  the  case. 


CHAP.  Ill 


THE  OLD  PARADOX 


139 


This  startling  phenomenon  has  been  a veritable  rock  of 
offence  in  the  theory  of  value.  The  highest  utility  acconir 
panied  by  the  sTnallp.cit  value  is  a strange  paradox.  It  is 
true  that,  in  confusing  Usefulness  and  Use  Value,  economists 
did  not  apprehend  and  describe  the  state  of  the  case  quite 
exactly.  When  they  falsely  ascribed  to  the  iron  a high  “ use 
value  ” and  to  the  diamond  a low  “ use  value,”  the  only 
reason  for  surprise  was  that  the  “ exchange  value  ” of  these 
goods  went  so  entirely  in  the  opposite  direction.  But  this  was 
only  to  change  the  name  of  the  opposition,  not  to  take  away 
any  of  its  sharpness.  There  were  plenty  of  attempts  to  bridge 
the  fatal  contradiction  by  involved  explanations,  but  these  were 
unsuecessful ; and  so  it  happens  that,  from  Adam  Smith’.s  time, 
to  our  own,  innumerable  theorists- have. -despaired  of  finding 
the~Sature  andT  measure  of  value  in  any  rft1a.tion  to  human 
wellbeing,  and  have  fallen  back  upon  quite  foreign  and  often 
wonderful  lines  of  explanation,  such  as  labour  or  labour  time, 
costs  oF~ production,  resistance  of  nature  to  man,  and  the  like. 
Btrtrunable  to  get  rid  of  the  feeling  that  the  value  of  goods 
must  have  sometliing  to  do  with  utility  and  human  wellbeing, 
they  put  down  the  want  of  harmony  between  the  utility  and 
the  value  of  goods  as  a rare  and  perplexing  contradiction,  a 
contradiction  4conomiq%ic. 

In  what  follows  I mean  to  prove  that  the  older  theory  had 
no  need  to  abandon  the  most  natural  explanation.  The 
measure  of  the  utility  which  depends  on  a good  is.  actually 

and  p.vprywbp.re.  the  measure  of  value  for  that  good.  To  prove 
this  nothing  more  is  necessary  than  a dispassionate  but  keen 
casuistical  investigation  into  the  question.  What  is  the  gain 
to  our  wellbeing  that,  in  any  given  circumstances,  depends  on 

a good  ? I say  deliberately  “ casuistical  ” investigation  ; for 
the  entire  theory  of  subjective  value  is,  properly,  nothing  else 
than  a system  of  casuistry,  determining  when,  under  what 
circnmstances,  and  how  far  our  wellbeing  is  dependent  upon 
any  particular  good.  It  is  very  remarkable  that  the  ordinary 
man  in  everyday  life  is  constantly  making  casuistic  distinc- 
tions of  this  kind,  and  making  them  with  great  certainty. 
He  seldom  makes  a mistake,  and  he  never  makes  a mistake  in 

the  principle.  He  may,  of  course,  ascribe  a trifling  value  to  a 
diamond  if  he  mistakes  it  for  a glass  bead.  But  the  theoretical 


140 


THE  AMOUNT  OF  VALUE 


BOOK  HI 


consideration — wliicli  is  quite  irrelevant  here — that  without 
water  tlie  human  race  could  not  continue  in  life,  would  never 
lead  him  to  the  casuistical  conclusion  that  every  gallon  of 
water  which  flows  from  the  village  spring  is  a good  of  priceless 
value,  or  worth  thousands  of  pounds.  Our  task,  then,  is  to 
hold  the  niirrar  up.to  those  casuistical  distinctions  which  men 
make  in  the  ordinary  affairs  of  life.,  and  to  bring  those  laws, 
which  the  ordinary  man  instinctively  handles  with  certainty, 
to  clear  and  conscious  presentation. 

What  human  wellbeing  may  gain  from  a good,  and  thus 
the  advantage  which  is  dependent  on  a good,  is,  in  most  cases,^ 
the  .satisfaction  of  a.  wanL  The  casuistical  consideration  that 
really  determines  how  far  a person’s  wellbeing  depends  upon 
a particular  good  is  found  in  the  answer  to  two  questions : 

first,  which, among  two  or  more  wants,  depends  on  it  ? and, 

second,  what  is  the  urgency  of  the  dependent  want  or  of  its 
satisfaction  ? 

For  convenience  we  shall  take  the  second  question  first, 
and  answer  it  in  the  present  chapter.  Jt  is  a familiar  faet 
that  our  wants  vary  very  greatly  in  importance.  We  are 
accustomed  to  rank  them  according  to  the  seriousness  of  the 
consequences  which  their  non-satisfaction  has  on  our  wellbeing. 
Thus  we  attach  the  greatest  weight  to  those  wants  the  non- 
satisfaction of  which  would  T;)e  followed  by.  death.  Next  to 
these  we  place  wants  the  non-satisfaction  of  which  would 
result  in  some  serious  permanent  injury  to  our  health,, h^onour, 
or  happiness.  Below  these  again  come  such  wants  as  expose 
us  to  more  temporary  injuries,  pain,  or  deprivations.  Finally, 
we  put  in  the  very  lowest  class  those  wants  the  non-satis- 
faction of  which  costs  us  nothing  more  than  a very  slight 
unpleasantness,  of  the  deprivation  of  some  qtiite"TnsTgnificant 
pleasure.  Arranging  our  wants  according  to  these  characteristics 
we,  obtain  a regularly  graduated  scale  of  wants.  Of  course 
as  differences  of  bodily  and  mental  disposition,  culture,  and  so 
on,  result  in  very  marked  difi’erences  of  wants,  this  scale  will 
come  out  very  different  for  different  individuals,  and  even  for 
^the  same  individual  at  different  times.  All  the  same,  every 
practical  man  whose  means  are  limited  must  have  a scale 

On  certain  comparatively  rare  exceptions  see  Conrad’s  Jahrhiieher,  vol. 
xiii.  p.  42. 


CHAP.  Ill 


KINDS  OR  CONCRETE  WANTS? 


141 


■mnrpi  nr  less  clearly  before  Vn's  mind  i£-hp  wniilrl  tthiVp.  a cVinicf 

among  thRSP.  wants,  and  even  theorists  have  often  had  occasion 
to  sketch  such  a scale  from  the  “ objective  ” standpoint  of 
impartial  scientific  consideration. 

So  far  everything  would  be  simple  and  certain  were  it 
not  that  there  is  an  ambiguity  when  we  speak  of  graduation 
OP  ranking  of  wants.  We  may  mean  by  these  terms  either 
the  graduation  of  wants  as  kinds  of  wants,  or  the  graduntinn 
of  degrees  of  wants,  the  concrete  individual  feelings  of  want ; 
and  these  two  are  essentially  different,  even  divergent.  If 
w^e  compare  kinds  of  wants,  looked  at  as  a whole,  according 
to  their  importance  for  human  wellbeing,  there  is  no  doubt 
whatever  that  to  the  needs  of  subsistence  would  lie  allotted 
the  first  ranb;.  to  the  needs  of  housing  and  clothing  a rank 
not  much  inferior,  to  the  wants  satisfied  by  tobacco,  spirituous 
liquors,  music,  etc.,  a very  much  less  important  place,  while 
the  wants  of  ornament  and  the  like  would  have  a very  in- 
significant rank  indeed. 

the  graduation  of  coTiCTete  feelings  of  want  is  esseh- 
tially  different  from  this.  Within  one  and  the  same  kind  of 
want  the  feeling  of  want  is  not  always  uniform,  not  always 
equally  strong.  Every  feeling  of  hunger  is  not  equally 
intense,  and  every  satisfaction  of  hunger  is  not  equally  per- 
fect. In  the  class  of  “ needs  of  subsistence,”  for  instance, 
the  concrete  want  of  a man  who  has  not  eaten  a morsel  for 
eight  days  is  infinitely  more  urgent  than  that  of  another  man 
who  has  already  got  through  two  courses  of  his  ordinary  dinner, 
and  is  meditating  whether  he  should  have  a third.  In 
the  graduation  of  concrete  wants  we  have  to  deal  with  an 
entirely  different  state  of  affairs,  and  with  a much  greater 
variation.  In  the  scale  -of- fa^Zs-olvscants-dhe  “needs  of  sub- 
sistence”  came  far  and  away  before  the  desim  for  tobacco,  for 
liquor,  for  ornament,  etc.  In  the  scale  of  concrete  wAuts, 
wants~5eIongm^ to  the  most  various  kinds  cross  and  intersect 

each  othen  It  is”  true  that,  everrTefe,  the'  most  important- 
concrete  wants  in  the  most  important  classes  of  wants  stand 
at  the  top  of  the  scale ; but  the  less  important  concrete  wants 
of  these  classes  are  frequently  overpassed  by  concrete  wants 
of  much  inferior  classes — the  bottom  members  of  the  highest 
class,  perhaps,  overpassed  by  the  top  member  of  the  lowest 


142 


THE  AMOUNT  OF  VALUE 


BOOK  III 


class,  It  is  very  much  the  same  as  if  a geographer  were  one 
time  to  arrange  the  Alps,  Pyrenees,  and  Harz  by  their  height 
as  mountain  ranges,  and  another  time  were  to  arrange  their 
single  summits.  As  ranges  the  Alps  would,  of  course,  come 
before  the  Pyrenees,  and  the  Pyrenees  before  the  Harz.  But, 
in  comparing  individual  heights,  a great  many  of  the  Alpine 
summits  would  take  rank  below  individual  peaks  of  the 
Pyrenees,  some  even  below  hills  in  the  insignificant  Harz. 

And  now  the  question  is.  When  goods  have  to  be  valued. 
by  wbip.b  seale  shn11  wc  measure  the  importance  of  the  wants 
. they  siihserve — the  scale  of  kinds  or  the  scale  of  concrete 

wants,?  When  the  older  theory  came  to  this  dividing~of~the 

ways — the  very  first  opportunity  offered  it  of  making  a mis- 
take— it  chose  the  wrong  wav.  It  adopted  f.be  seale,  nf  kinds, 
On  this  scale  the  class  “ Needs  of  Subsistence  ” occupies  one  of 
the  most  conspicuous  places,  while  the  class  “Desire  of  Orna- 
\/ ment  ” has  a subordinate  place.  Thus  the  older  theory  decided 
that  bread,  universally,  has  a high  “ use  value,”  and  diamonds 
a low  “ use  value,”  and,  naturally,  was  very  much  astonished 
that  the  value  practically  put  upon  those  two  kinds  of  goods 
was  exactly  the  reverse  of  this. 

Now  their  conclusion  was  quite  wrong.  What  the  casuist 
must  say  to  himself  is  : If  I have  a slice  of  bread  I can  indeed 
still  this  or  that  concrete  feeling  of  hunger  as  it  arises,  but— I 
can  never  satisfy  the  totahtY  of  such  feelings — the  actual  and 
possible,  present  and  future,  feelings  of  hunger  wliich.  together- 
make  up  the  kind  “ needs  of  subsistence.”  Obviously,  then,  it 
is  quite  out  of  place  to  attempt  to  measure  the  service  which 
the  piece  of  bread  can  render  me  by  the  fact  that  the  totality 
of  such  feelings  possesses  much  or  little  importance.  To  do 
so  would  be  like  the  act  of  a man  who,  on  being  asked 
as  to  the  height  of  the  Kahlenberg,  an  insignificant  off-shoot 
of  the  Alps  near  Vienna,  were  to  ascribe  to  it  the  height  of 
the  Alpine  chain  ! As  a fact  it  would  never  oeoiir  to  n.s 
in  practical  life  to  value  every  bit  of  bread  in  our  posseu- 
|ion  as  a treasure  of  infinite  importance.  We  do  not  rejoice 
every  time  we  buy  a baker’s  roll  as  if  we  had  saved  a life, 
nor  do  we  blame  a man  as  spendthrift  when  he  carelessly 
gives  away  a slice  of  bread  or  throws  it  to  a dog.  Yet  this 
is  the  judgment  we  must  pass  if  we  would  transfer  the  import- 


CHAP.  Ill 


THE  SCALE  OF  SATISFACTION 


14:5 


ance  of  the  kind  “ needs  of  subsistence,”  on  the  satisfaction  of 
which  our  very  life  depends,  to  the  goods  which  actually 
minister  to  that  satisfaction. 

This  much  is  clear,  then,  that  the  value  we  ascribe  to  goods 

has  nottitrrg  Tn~r1n  wi't-.h  thp  graduation  of  kinris  of  want,  hut 

only  .witimie~^aduation  of  concrete  wants.  In  order  to  bring 
out  a]jr~fhat  is^ihvdrved  in  this  conclusion,  it  may  be  desirable 
to  put  more  clearly  certain  points  relating  to  the  composition 
of  this  graduated  scale,  and  to  put  the  whole  argument  on  a 
surer  basis  than  has  been  done  in  the  foregoing  analysis. 

Most  of  OUT  wa.uts  arc  divisible,  in  the  sense  that  they  are 
susceptible  of  piecemeal  satisfaction.  When  hungry  I am  not 
compelled  to  choose  between  satisfying  my  hunger  completely 
and  going  entirely  unsatisfied.  I may  take  the  edge  off  my 
appetite  by  a moderate  meal,  intending,  perhaps,  to  dispel  the 
feeling  of  hunger  altogether  later  on  by  a full  meal,  or,  perhaps, 
to  make  shift  with  the  partial  satisfaction  I have  got.  Naturally 
the  partial  satisfaction  of  a concrete  want  has  another  and  a 
smaller  importance  for  my  wellbeing  than  a complete  satis- 
faction of  the  same  ; and,  to  a certain  extent,  this  of  itself  would 
suffice  to  call  attention  to  the  above-mentioned  phenomenon 
that,  within  a kind  of  wants,  there  are  concrete  wants  (or 
degrees  of  want)  of  varYing  importance.  But  with  this  is 
connected  a further  notable  fact.  Tt  is  an  experience,  as 
familiar  as  it  is  deep-rooted  in  human  nature,  that  jthp.  .same 
enjoyment,  when  constantly  repeated,  gives  us.  heyonrl  a.  certain 
point,  a constantly  decreasing  gratification,  till,  in  the  end,  it 
changes  into  its  opposite.  Any  one  can  prove  for  himsedn 
that  at  a meal  when  the  fourth  or  fifth  course  is  reached,  the! 
appetite  is  not  nearly  so  keen  as  at  the  first  course,  and  that,  f 
if  there  are  too  many  courses,  a point  is  reached  where  enjoy- 
ment turns  into  discomfort  or  disgust.  The  same  occurs  in 
too  long  a concert,  lecture,  walk,  play,  and,  generally  speak- 
ing, in  the  case  of  most  physical  as  well  as  intellectual 
enjoyments. 

If  we  put  the  essence  of  these  weU-known  facts  into 
technical  language  we  get  the  following  proposition : The  con- 
crete degrees  of  want  into  which  our  sensations  of  want  may 
he  divided,  or  the  successive  degrees  of  satisfaction  obtained 
from  similar  amounts  of  goods,  are  usually  of  very  dissimilar- 


144 


THE  AMOUNT  OF  VALUE 


BOOK  III 


importaace — -indeed,  of  importance  which  diminishes  step  b_v_ 
step  to  zero. 

This  will  explain  a whole  series  of  propositions  which  were 
simply  asserted  above.  It  explains,  firstly,  how,  in  one  and 
the  same  kind  of  wants,  there  may  be  concrete  wants,  or-defp-ees 
of  want,  of  varying  urgency.  Indeed  in  the  case  of  all  divisible 
satisfactions  as  the  term  is  defined  above — that  is,  in  the  great 
majority  of  cases — this  not  only  may  be  but  must  be  so,  quite 
normally  and,  so  to  speak,  organically.  It  explains,  again,  that, 
even  in  the  most  important  kinds  of  wants,  there  are  lower  and 

lowest  grades  of  importance.  Properly  speaking,  the  more 
important  kind  is  marked  off  from  the  less  important  only  by 
the  fact  that,  to  some  extent,  its  head  rises  higher  than  the 
others,  while  its  base  stands  on  the  same  level  as  all  the  others. 
And,  finally,  it  explains  that,  not  only  may  it  occasionally 
happen,  as  I have  just  said,  that  a concrete  want  belonging  to 
a kind  which,  on  the  whole,  is  more  important,  may  be  out- 
weighed by  some  individual  concrete  want  of  a kind,  on  th,p. 
whole,  less  important,  but  that  this  happens  as  a perfectly 
normal,  ordiWry,  and  organic  occurrence.  There  will  always, 
for  instance,  he  innumerable  concrete  subsistenop.  wa.nt.<i  whip.h 
are  weaker  and  less  urgent  than  many  a concrete  want  of  quite 
unimportant  classes  ; such  things  as  the  desire  of  ornament,  the 
love  of  dancing,  the  craving  for  tobacco,  etc.,  will  often  be  stronger 
than  the  need  of  good  food  and  warm  clothing. 

If  we  try  to  represent  the  classification  of  our  wants  by  a 
typical  scheme  we  must,  on  the  principles  just  laid  down,  give 
it  something  like  the  following  shape  ^ : — 


1 II  III  IV  V 

10 

9 9 

8 8 8 

7 7 7 7 

6 6 6.6 

5 5 5.5 

4 4 4 4 4 

3 3 3.3 

2 2 2.2 

11111 
0 0 0 0 0 


VI  VII  VIII  IX  X 


5 

4 4 

3 . 3 

2.22 
1.111 
0 0 0 0 0 


^ See  Menger’s  Grundsdtze  der  Volhsioirthschaftslehre,  p.  93. 


CHAP.  Ill 


A TYPICAL  SCHEME 


145 


In  this  scheme  the  Eoman  figures  indicate  the  various  kinds 

of  wants,  decreasing  in  order  of  importance  from  I to  X.  I 
indicates  the  most  urgent  kind,  say  the  needs  of  subsistence ; 
V indicates  a kind  of  medium  importance,  say  that  of  spirituous 
liquors ; while  X indicates  the  least  important  conceivable 
kind. 

The  Arabic  figures  10  to  1,  again,  indicate  the  concrete 

wants  and  degrees  of  want  that  occur  in  the  different  kinds. 

their  rank  being  shown  by  assigning  the  figure  10  to  the 
most  important  conceivable  want,  the  figure  9 to  that  next  in 
importance,  and  so  on,  tdl  the  last  figure  1 indicates  the  most 
insignificant  want  likely  to  occur. 

This  scheme  now  puts  before  us  the  fact  that  the  morn. 
important  the  kind,  the  higher  stands  the  -mnst  important 
concrete  want  contained  in  tbp.  Id  ml ; but  it  shows  at  the 
same  time  that  in  each  kind  there  are  all  grades  of  importance, 
from  greatest  to  leas^.  The  only  exceptions  in  the  scheme 
occur  in  classes  IV  and  VII,  in  which  some  individual  members 
of  the  descending  scale  are  wanting.  These  represent  the 
(comparatively  rare)  kinds  where,  on  technical  grounds,  ^ 
successive  sa±.isfa.p.f-.inn  fiy  means  of  partial  acts  is  either  incom- 
plete or  quite  impossible,  and  where,  accordingly,  the  want 
must  either  be  entirely  satisfied  or  not  satisfied  at  aU.  The 
want  met  by  kitchen  ranges,  for  instance,  is  generally  met  so 
completely  by  one  range  that  we  should  have  absolutely  no 
use  for  a second.  Finally,  the  scheme  shows  that  in  the  most 
important  kind  (I)  there  occur  concrete  wants,  which  bear  the 
lowest  figure  of  importance,  while,  in  almost  all  the  other 
kinds  which  stand  imder  it  in  importance,  there  are  concrete 
wants  that  bear  higher  figures. 


CHAPTER  IV 


THE  MARGINAL  UTILITY 

Turning  now  to  the  second  question  suggested  in  last  chapter 
we  ask,  Of  several  or  many  wants  which  one  is  it  that  actually 
depends  on  a particular  good  ? 

This  question  would  not  be  put  at  all  if  the  circumstances 
of  economic  life  were  so  simple  that  single  wants  always 
stood  over  against  single  goods.  If  a good  were  adapted 
to  satisfy  a single  concrete  want,  and  if  it  were  at  the  same 
time  the  only  one  of  its  kind,  or,  at  least,  the  only  one  of 
its  kind  available,  it  would  be  quite  clear  without  further 
consideration  that  the  satisfaction  of  the  single  want  depended 
on  our  command  over  the  single  good.  But  in  practical  life 
the  matter  is  scarcely  ever  so  simple  as  this ; on  the  contrary, 
it  is  usually  complicated  simultaneously  from  two  sides.  Eirst^ 
one  and  the  same  good  is  usually  adapted  to  satisfy  various 

concrete  wants,  which  wants  again  possess  various  degrees  of 
importance ; and  second,  several  goods  of  one  and  the  same 
kind  are  frequently  available,  thus  leaving  it  to  caprice  which 
good  will  be  used  for  the  satisfaction  of  an  important,  and 
which  for  an  unimportant  want.  To  give  the  simplest  possible 
example.  I have  been  shooting  for  a few  days  on  the  mount- 
ains, and  by  some  accident  I miss  my  companions./  I am  far 
from  any  house  or  village,  and'tEe  only  food  I have  for  myself 
and  my  dog  is  two  entirely  similar  baker’s  rolls.  It  is  clear  that 
the  satisfaction  of  my  hunger  is  of  infinitely  more  importance  to 
me  than  the  sa.tisfaction  of  the  dog’s  hunger  and  it  is  just  as  clear 
that  it  lies  with  me  which  of  the  two  rolls  I shall  consume  and 
which  I shall  give  to  the  dog.  And  now  the  question  arises. 
Which  of  the  two  wants  here  is  dependent  on  the  bread  ? 


CHAP.  IV 


THE  LEAST  IMPORTANT  WANT 


147 


One  is  tempted  to  answer,  That  want  to  which  the  bread 
was  actually  devoted.  But  it  is  evident  at  once  that  this  is 
an  erroneous  conclusion.  It  would  amount  to  saying  that  the 
two  rolls,  devoted  as  they  are  to  the  satisfaction  of  wants  of 
different  importance,  must  possess  different  values ; while  it 
does  not  admit  of  question  that  two  similar  goods,  available 
under  similar  conditions,  must  be  entirely  equal  in  value. 

Here,  again,  an  easy  casuistical  consideration  gives  the 
proper  solution.  The  problem  is : Which,  among  several 
wants,  is  dependent  on  a commodity  ? This  resolves  itself 
very  simply  when  it  is  known  which  want  it  isThaIrwoTiM/ai/ 
9f  if  ^ba,t  commodity  were  not  present : that 

want  is  evidently  the  dependent  one.  And  now  it  is  easy  to 
show  that  the  want  which  failed  of  its  satisfaction  would  not 
be  that  want  which  the  particular  commodity  was,  accidentally 
and  capriciously,  selected  to  satisfy,  but  would  always  be  the 
least  imvortant  among  all  the  wants  irL  qup-stioD  ; that  is  to  say, 
among  all  those  wants  which  would  formerly  have  been  pro- 
vided for  out  of  the  total  stock  of  this  class  of  goods. 

Consideration  for  one’s  own  convenience,  as  obvious  as  it 
is  imperative,  induces  every  reasonable  man  who  acts  economic- 
ally to  maintain  a certain  fixed  order  in  the  satisfaction  of 
his  wants.  No  one  woidd  be  so  foolish  as  to  exhaust  the 
resources  at  his  command  in  satisfying  trifling  wants,  or  wants 
that  could  be  easily  ignored,  and  thus  to  deprive  himself  of 
the  means  of  satisfying  necessary  wants.  On  the  contrary, 
every  one  would  take  care  to  use  the  resources  at  his  command, 
in  the  first  instance,  to  provide  for  his  most  important  wants ; then 
for  wants  that  come  after  these  in  importance  ; then  for  those  of 
the  third  rank,  and  so  on  ; — always  arranging  in  such  a way 
that  the  lesser  wants  were  only  provided  for  wlipn  all  thp  hialipj- 
wants  had  been  supplied,  and  there  still  remained  some  means  of 

satisfaction  to  snare.  We  act  according  to  the  same  obvious 
and  reasonable  principles  when  our  stock  undergoes  a change 
by  the  loss  of  one  member  of  that  stock.  Naturally  this  will 
alter  the  plan  according  to  wliich  we  have  been  employing  our 
resources.  Not  all  the  wants  we  had  arranged  to  satisfy  can 
now  be  provided  for,  and  some  abatement  in  the  totality  of 
satisfaction  is  unavoidable.  But,  of  course,  the  wise  man  will 
try  to  lav  the  burden  on  the  least  sen.sitive  .gpnt ; that  is  to  say. 


148 


THE  MARGINAL  UTILITY 


BOOK  III 


if  the  loss  chances  to  be  in  a commodity  which  was  destined 
to  a more  important  use,  he  will  not  give  up  the  satisfaction 
of  this  more  important  want,  and,  by  holding  on  obstinately 
to  his  old  plan,  provide  satisfaction  for  the  less  important 
wants.  We  may  be  sure  that  he  will  satisfy  the  more 
important  want,  and  will  do  so  by  withdrawing  provision  from 
that  want,  among  all  the  wants  hitherto  marked  out  for 
provision,  on  the  satisfaction  of  which  least  depends.  To  put 
it  in  terms  of  our  former  illustration : if  our  sportsman  loses 
the  roll  which  he  has  meant  for  himself,  he  will  scarcely  feed 
his  dog  with  the  one  that  remains,  and  expose  himself  to  the 
danger  of  starving.  He  will  suddenly  change  his  plan,  elevate 
the  roll  that  remains  into  fulfilling  its  more  important  function 
only,  and  shift  the  loss  to  the  least  important  function,  the 
feeding  of  the  dog. 

The  case,  then,  stands  as  follows.  Wants  which  are  more 
important  than  this  “ last  ” want  will  not  be  alfectftd~by  th^ 

loss  of  the  good,  for  their  satisfaction  is,  as  before,  guaranteed 

in  case  of  need  by  the  replacement  of  substitutes.  Nor  will 
those  wants  be  affected  which  are  less  important  than  this 
“ marginal  want,”  for  they  go  unsatisfied  whether  the  good  is 
there  or  not.  The  only  want  affected  is  the  last  of  those  that 
otherwise  would  be  satisfied  : it  will  be  satisfied  if  the  good  is 
there ; it  will  not  be  satisfied  if  it  is  not  there.  It  is  thus  the 
dependent  want  we  were  seeking. 

Here  then  we  have  reached  the  goal  of  the  present  inquiry, 
and  may  formulate  it  thus : the  value  of  a good  is  measured 
by  the  importance  of  that  concrete  want,  or  partial  want,  which 

is  least  urgent  among  the  wants  that  are  met  from  the  avail - 

able  stock  of.  similar  goods.  What  determines  the  value  of  a 
good,  then,  is  not  its  greatest  utility,  not  its  average  utility, 
but  the  least  utihty  which  it,  or  one  like  it,  might  be  reason- 
ably employed  in  providing  under  the  concrete  economical 
conditions.  To  save  ourselves  the  repetition  of  this  circum- 
stantial description — which,  all  the  same,  had  to  be  somewhat 
circumstantial  to  be  quite  correct — we  shall  follow  Wieser  ^ 


^ Veher  den  Ursprung  und  die  Hauptgesetze  des  wirthschaftlichen  WertMs, 
p.  128.  Jevons  has  the  expressions  “final  degree  of  utility”  ariH  “tprminnl 
utility.”  With  MengRr:  who  first  formulated  the  above  law  with  entire  clear- 
ness, but  gets  along  without  the  convenience  of  a short  technical  expression. 


CHAP.  IV  THE  KEYSTONE  OF  ECONOMIC  THEORY 


149 


in  calling  this  least  utility — the  utility  that  stands  on  tlie  margin 
of  the  economically  permissible — the  economic  j\farginaUTtililiy 
of  the  good.  The  law  which  governs~a3noiint  of  value,  then, 
may  be  put  in  the  following  very  simple  formula  : The  value 
of  a good  is  determined  bv  the  amount  of  its  Marginal  ITtiUtar 

This  proposition  is  the  key-stone  of  our  theory  of  value. 
But  it  is  more.  Tn  my  onininn  it  is  the  rnaster-key  to  the 
action  of  practical  economic  men  with  regard  to  goods.  In  the 
simplest’  cases,  as  in  all  the  tangle  anct' complication  which  our 
present  varied  economic  life  has  created,  we  find  men  A^aluing 
the  goods  with  which  they  have  to  deal  by  the  marginal  utility 
of  these  goods,  and  dealing  with  them  according  to  the  result 
of  this  valuation.  And  to  this  extent  the  doctrjnp  of  marginal 
utility  is  not  only  the  key-stone  of  the  theory  of  -value,  but. 

as  affording  the  explanation^^  of . aU  . economical  transactions, 
it  is  the  key-stone  of  all  economical  theory^  Those  who 
ha-^observed  practical  life  closely  will,  I think,  be  convinced 
that  this  claim  is  not  exaggerated.  Kightly  to  observe 
and  rightly  to  interpret  what  has  been  observed,  however,  is 
an  art  not  always  easy ; and  in  what  follows  accordingly  we 
shall  make  use  of  the  value  theory  to  guide  us  in  observing 
and  interpreting  what  falls  within  its  sphere.  We  begin,  then, 
with  an  illustration  of  the  greatest  conceivable  simplicity. 

A colonial  farmer,  whose  log-hut  stands  by  itself  in  the 
primeval  forest,  far  away  from  the  busy  haunts  of  men,  has 

the  law  runs  as  follows  (p.  98) : “ In  every  concrete  case,  accordingly,  of  the 
satisfactions  of  want  guaranteed  by  the  total  quantity  of  goods,  it  is  only  those 
which  have  the  smallest  importance  for  the  person  that  are  dependent  on  hi.s 
commanfl  over  ,n.  flelimte  parNqii.antitv  of  the  amount  of  goods  at  his  disposal  ; 
and  the  value  of  aTiart-quantity  of  the  available  amount  of  goods  is,  accordingly, 
equal  to  the  importance  which  the  satisfactions  of  want  that  are  least  urgent 
among  all  the  satisfactions  guaranteed  by  the  total  quantity,  and  obtainable 
with  a similar  part -quantity,  have  for  that  person.” 

^ Even  where  men  do  not  act  egoisticall}'  but  altruistically,  they  have  occasion 
to  consider  the  marginal  utility,  viz,  that  marginal  utility  which  the  goods  given 
away  have  to  the  persons  who  get  them.  One  gives  donations,  charities,  and  the 
like,  when  the  importance  of  such,  measured  by  marginal  utility,  is  very  much 

higher  as  regards  the  wellbeing  of  the  receiver  than  as  regards-thai  of  the  giver, 
and  almost  never  when  the  converse  is  the  case.  I am  glad  to  know  that,  in  the 
idea  expressed  above,  I am  at  one  with  so  distinguished  an  economist  as  Walras. 
I can  only  express  my  entire  concurrence  with  what  he  says,  in  the  preface  to  his 
Theorie  de  la  Monnaie,  p.  11,  as  to  the  universal  importance  of  the  idea  of  marginal 
utility,  both  as  regards  theory  and  as  regards  the  practice  of  economic  life. 


150 


THE  MARGINAL  UTILITY 


BOOK  III 


iust  harvested  five  sacks  of  corn,  Tliese  must  serve  him 
till  the  next  autmnn.  Being  a thrifty  soul  he  lays  his  plans 
for  the  employment  of  these  sacks  over  the  year.  One  sack 
he  absolutely  requires  for  the  sustenance  of  his  life  till  the 
next  harvest.  A second  he  requires  to  supplement  this  bare 
living  to  the  extent  of  keeping  himself  hale  and  vigorous. 
More  corn  than  this,  in  the  shape  of  bread  and  farinaceous  food 
generally,  he  has  no  desire  for.  On  the  other  hand,  it  would 
be  very  desirable  to  have  some  animal  food,  and  he  sets  aside, 
therefore,  a third  sack  to  feed  poultry.  A fourth  sack  he 
destines  for  the  making  of  coarse  spirits.  Suppose,  now,  that 
his  various  personal  wants  have  been  fully  provided  for  by  this 
apportionment  of  the  four  sacks,  and  that  he  cannot  think  of 
anything  better  to  do  with  the  fifth  sack  than  feed  a number 
of  parrots,  whose  antics  amuse  him.  ISTaturally  these  various 
methods  of  employing  the  corn  are  not  equal  in  importance. 
If,  to  express  this  shortly  in  figures,  we  make  out  a scale  of 
ten  degrees  of  importance,  our  farmer  will,  naturally,  give 
the  highest  figure  10  to  the  sustenance  of  his  life ; to  the 
maintenance  of  his  health  he  will  give,  say,  the  figure  8 : then, 
going  down  the  scale,  he  might  give  the  figure  6 to  the  im- 
provement of  his  fare  by  the  addition  of  meat,  the  figure  4 to 
the  enjoyment  he  gets  from  the  liquor,  and,  finally,  to  the 
keeping  of  parrots,  as  expressing  the  least  degree  of  importance, 
he  will  give  the  lowest  possible  figure  1.  And  now,  putting 
ourselves  in  imagination  at  the  standpoint  of  the  farmer,  we 
ask.  What  in  these  circumstances  will  be  the  importance,  as 
regards  his  wellbeing,  of  one  sack  of  corn  ? 

This,  as  we  know,  will  be  most  simply  tested  by  inquiring, 
How  much  utility  will  he  lose  if  a sack  of^corn-gets  losJi-? 
Suppose  we  carry  out  this  in  detail.  Evidently  our  farmer 
would  not  be  very  wise  if  he  thought  of  deducting  the  lost 
8ack  from  his  own  consumption,  and  imperilled  his  health  and 
life  while  using  the  corn  as  before  to  make  brandy  and  feed 
parrots.  On  consideration  we  must  see  that  only  one  course 

is  conceivable : with  the  four  sacks  that  remain  our  farmer 

/ — - 

will  provide  for  the  four  most  urgent  groups  of  wants_aiid 
give  up  only  the  satisfaction  of  the  last  and  least  importanL 
the  marginal  utility — in  this  case,  the  keeping  of  parrots.  The 
only  difference,  then,  that  his  having  or  not  having  the  fifth 


CHAP.  IV 


THE  SACHS  OF  CORN 


151 


sack  of  corn  makes  to  his  wellbeing  is  that,  in  the  one  case, 
he  may  allow  himself  the  pleasure  of  keeping  parrots,  in  the 
other  he  may  not ; and  he  will  rightly  value  a single,  sack  of 
his  stock  acp.nrrimg  to  this  unimportant  utility.  And  not 
only  one  sack,  but  ^ery  single  sack ; for,  if  the  sacks  are 
equal  to  one  another,  it  will  be  all  the  same  to  our  farmer 
whether  he  lose  sack  A or  sack  B,  so  long  as,  behind  the  one 
lost,  there  are  still  four  other  sacks  for  the  satisfying  of  his 
more  urgent  wants. 

To  vary  the  illustration,  assume  that  our  farmer’s  wants 
reniam  the  same,  and  that  he  has  only  three  sacks  of  grain. 
What  now  is  the  value  of  one  sack  to  him  ? The  test  again 
is  quite  easily  applied.  If  he  has  three  sacks  he  can  and  will 
provide  for  the  three  most  important  groups  of  wants.  If  he 
has  only  two  sacks,  he  will  be  obliged  to  limit  himself  to  the 
satisfying  of  the  two  most  important  groups  and  give  up  the 
satisfying  of  the  third,  that  of  animal  food.  The  possession  of 
thp.  tbirr]  sack — and  the  third  sack,  be  it  remembered,  is  not 
a definite  sack  but  any  of  the  three  sacks,  so  long  as  there  are 
other  two  behind  it — directly  carries  witli  it,  therefore,  the 
satisfaction  of  his  third  most  important  want ; that  is,  the  last 
or  least  of  those  wants  covered  by  the  three  sacks  which 
constitute  his  total  stock.  Any  estimate  other  than  that 
according  to  the  marginal  utility  would,  in  this  case  also, 
obviously  run  counter  to  facts,  and  would  be  quite  incorrect 

Finally,  suppose  that  our  farmer’s  wants  remain  as  before, 
and  that  Viq  nuly  possesses  one  single  sack  of  corn.  In  this 
case  it  is  perfectly  clear  that  all  less  important  methods  of 
employing  the  corn  are  out  of  court,  and  that  it  will  be  devoted 
to  and  spent  in  sustaining  the  farmer’s  life — a function  for 
which  it  just  suffices.  And  it  is  as  clear  that  if  this  single 
sack  fails  the  farmer  wiU  no  longer  be  able  to  support  himself 
in  life.  His  possession  of  the  sack,  therefore,  means  life ; his 
loss  of  it  means  death : the  single  sack  of  corn  has  the  greatest 
conceivable  importance  for  the.  wellbeing  of  the  farmer.  And 
all  this  is  still  in  conformity  with  our  principle  of  marginal 
utility.  The  greatest  utility — the  preservation  of  life — is  hern- 
the  sole^  as  well  as  the  last  or  marginal  utility. 

These  estimates  according  to  marginal  utility  are  not  merely 
“ academic.”  No  one  will  doubt  tliat  our  farmer  on  due  occasion 


152 


THE  MARGINAL  UTILITY 


BOOK  III 


— say,  on  an  offer  made  him  for  the  corn — -would  act  practi- 
cally according  to  the  same  estimates.  Any  one  of  us,  placed 
in  his  position,  would  undoubtedly  be  inclined  tb  let  one  of  the 
five  sacks  go  pretty  cheap  in  consideration  of  and  in  correspond- 
ence with  its  small  marginal  utility.  He  would  charge  con- 
siderably more  for  one  of  the  three  sacks.  And  he  would 
not  let  the  irreplaceable  sinaU  sack,  with  its  enormous  Tna.rgina.1 

ntib'ty,  go  for  any  price  whatever. 

Transfer,  now,  the  field  of  illustration  from  the  solitary  in 
the  primeval  forest  to  the  bustle  of  a highly  organised  economic 
community.  Here  we  encounter,  in  an  altogether  dominating 
position,  the  empirical  proposition  that  quantity  of  goods,  stands 
in  inverse  ratio  to  value  of  goods,  The  more  goods  of  one 
kind  there  are  in  the  market,  the  smaller,  ceteris  parih.cs,  is  the 
value  of  the  single  commodity,  and  vice  xersd.  Every  one 
knows  that  economic  theory  has  made  use  of  this  empirical 
proposition — the  most  elementary  proposition  in  the  doctrine 
of  price — to  establish  the  law  of  Supply  and  Demand.  ’ But 
this  proposition  maintains  its  validity  quite  apart  from  exchange 
and  price.  For  instance,  how  much  more  value  does  a collector 
put  upon  the  single  specimen,  which  represents  a class  in  his 
collection,  than  upon  one  of  a dozen  of  such  specimens  ? It 
is  easy  to  show  that  well-authenticated  facts  of  experience  like 
these  follow,  as  a natural  consequence,  from  our  theory  of 
marginal  utility.  The  more  individual  goods  there  are  avail- 
ablft  in  any  p.1a.ss,  the  more  completely  can  the  wants  to  which 
they  relate  be  satisfied,  and  the  jess  important  are  the  wants 
which  are  last  .satisfied- — those  whose  satisfaction  is  imperilled 
by  the  failure  of  one  of  the  goods.  In  other  words,  the  more 
individual  goods  there  are  available  in  any  class,  the  smaller 
is  the  marginal  utility  which  determines  the  value.  If,  again, 
there  are  available  so  many  individual  goods  of  one  class 
that,  after  all  the  wants  to  which  they  are  relative  are  com- 
pletely satisfied,  there  still  remains  a number  of  goods  for 
which  no  further  useful  employment  can  be  found,  then  the 
marginal  utility  is  equal  to  zero,  and  a commodity  of  that 
particular  class  is  valueless. 

Here,  then,  we  have  an  entirely  natural  explanation  of 
.phenomenon  which  originally  struck  us  as  so  surprising,  that 
comparatively  “ useless  ” things,  such  as  pearls  and  diamonds. 


CHAP.  IV 


THE  OLD  PARADOX  EXPLAINED 


153 


have  so  high  a value,  while  infinitely  more  “ useful  ” things, 
like  bread  and  iron,  have  a far  less  value,  and  water  and  air 
no  value  at  all.  Pearls  and  diamonds  are  to  be  had  in  such 
small  quantities  that  the  relative  want  is  only  satisfied— tCL-a. 
trifling  eid^ent.  6ind  the  point  of  marginal  utility  which  the 
satisfaction  reaches  steinds  relatively  high.^  Happily  for  us, 
on  the  other  hand,  bread  and  iron,  water  and  light,  are,  as  a 
rule,  to  be  had  in  such  q^uantities  that  the  satisfaction  of  all 
the  more  important  wants  which  depend  on  them  is  assured 
Only  very  trifling  concrete  wants,  or  no  wants  at  all,  are 
dependent,  for  instance,  on  the  command  over  a piece  of  bread 
or  a glass  of  water.  It  is,  of  course,  true  that  in  abnormal 
circumstances — as,  for  instance,  in  besieged  towns,  or  in  desert 
journeys,  where  water  and  food  are  scarce,  and  small  stores 
only  suffice  to  meet  the  most  , urgent  concrete  wants  of  meat 
and  drink — the  msTjcfinal  utility  flies  up.  According  to  our 
principles  the  value  of  those  goods,  otherwise  of  so  little 
account,  must  rise  also,  and  the  inference  finds  ample  empirical 
confirmation  in  the  enormous  prices  paid  in  such  circumstances 
for  the  most  wretched  means  of  subsistence.  Thus  those  very 
facta  wbieb,  at  first  sight  seemed  to  eontradict  our  theory  that 
the  amount  nf  value  is  dependent  on  the  amount  of  utility 
conditioned,  on  closer  examination  afford  a striking  confirma- 

_tinn-of..i^ 

' To  guard  against  possible  confusion  it  should  be  noted  that  the  German 
writers  on  value  generally  speak  of  “satisfaction  of  want”  under  the  metaphoj 
of  a descending  Bc.a1fi  : the  increasing  satisfaction  cree|)s  down  the  scale,  and  the 
point  of  saturation  is  zero,  not  100. — W.  S. 


CHAPTEE  V 


COMPLICATIONS 

The  cases  we  have  hitherto  considered  have  been  comparatively 
easy  of  interpretation  ; but  practical  economic  life  brings  out  a 
great  many  complications  which  the  practical  man  treats  with 
easy  assurance,  but  the  theorist  finds  considerable  difficulty  in 
explaining.^  To  understand  these  everything  depends  on  the 
correctness  of  our  casuistical  decision  as  to  that  amount  of 
utility;_  which,  the__giyen__circumst^ces,'~^is  the  marginal 
utility.  For  this  purpose  the  following  general  direction  may 
serve  as  master-key  to  all  the  more  difficult  problems  of  value. 
We  must  look  at  the  economic  position  of  the  person  who  is 

estimating  the  value  of  a good  from  two  points  of  view.  First, 
we  must  in  thought  .add  the  good  to  his  stock,  and  consider 
what  further  and  lesser  concrete  wants  can  nmo.  be  satisfied. 
Second,  we  must  in  thought  deduct  Ahe  good,  from  his  stock 
and  consider  again  what  concrete  wants  will  still  be  satisfied. 
In  the  latter  case,  of  course,  it  becomes  manifest  that  a certain 
layer  of  wants,  viz.  the  lowest  layer,  has  lost  its  former  pro- 
vision ; this  lowpst  laypr  hnrlipates  the  marginal  utility  that 
determines  the  valuation.^ 

1 On  the  rfilation  of  theory  and  practice  in  the  sphere  of  valuation  see 
Conrad’s  Jahrbucher,  vol.  xvi.  p.  74. 

’ Generally  speaking,  there  are  two  occasions  on  which  a man  is  called  on  to 
form  a judgment  as  to  value.  One  is  on  parting  with  a f^ood  in  Lig-p»sRession, 
e.g.  in  giving  it  away,  or  exchanging,  or  consuming  it ; the  other,  on  acquiring  a 
good.  In  the  two  cases  the  form  which  the  valuation  assumes  in  thought  is, 
externally,  a little  different.  A good  which  a man  has  he  values  according  to  the 
injury  which  he  would  suffer  by  its  loss  ; he  values  it,  therefore,  according  to  the 
last  satisfaction  which  is  assured  him  by  having  it.  A good  which  a man  has  not 
he  values,  on  the  contrary,  according  to  the  increment  of  utility  which  its  acquisi- 
tion brings  ; i.e.  according  to  the  most  urgent  among  those  satisfactions  which, 


CH.  V VALUE  DETERMINED  BY  A FOREIGN  UTILITY  155 


The  first  very  obvious  but,  theoretically,  not  unimportant 
application,  leads  us  to  recognise  that  in  valuing  a good  some- 
times it  is  the  importance  of  some  one  individual  concrete  want 
that  is  taken  into  consideration,  sometimes  it  is  the  import- 
ance of  many  concrete  wants  that  has  to  be  summed  up.  That 
is  to  say,  in  the  nature  of  things  the  layers  of  want  that 
depend  on  the  object  we  are  valuing  may  turn  out  to  be  very 

various,  in  compass  and  extent  accm-dino-  to  the  c.nTistitiiti.nD_Df 

that  object.  If  it  is  a single  individual  of  a perishable  group 
of  goods,  for  instance  a food,  the  marginal  utility  will  usually 
include  no  more  than  one  single  concrete  want,  or  even  a 
partial  want.  If  the  object,  again,  is  a durable  good,  and  thus 
susceptible  of  repeated  acts  of  use,  or  if  it  is  a number  of  goods 
considered  as  a whole,  it  is  natural  that  an  entire  sum — in 
certain  circumstances,  a very  great  sum — of  concrete  wants  may 
be  included  in  the  layer  of  wants  that  depends  on  it.  On  the 
possession  or  non-possession  of  a piano,  for  instance,  depend 
hundreds  of  musical  enjoyments  ; on  the  possession  of  a cask  of 
wine  hundreds  of  pleasures  of  the  palate ; and  the  importance 
of  those  pleasures  naturally  must  be  summed  up  in  valuing 
these  goods.^ 

To  pass  on  now  to  another  far-reaching  complication.  It 
follows  from  our  earlier  analysis  that  the  marginal  utility 
which  determines  the  value  of  a good  is  not  (or  is  only  acci- 
dentally) identical  with  the  utility  which  the  good  itself 
actually  afibrds.^  As  a rule,  the  marginal  utility  of  any  good  is 
a foreign  utility,  the  utility  of  the  last  individual  good  (or  of 
the  last  similar  part,  which  may  be  takeiTTo  replace  it.  In 
simple  cases  this  utilitj^  although  the  utility  of  another  good, 
is  at  the  least  the  utility  of  a,  good  of-tbe-same  kin^.  In  the 
illustration  already  madp  use  of,  the  value  of  each  individual 

in  the  conditions  of  his  fortunes  up  till  the  present  time,  he  has  not  been  able  to 
obtain.  Naturally  we  get  the  same  result  by  either  method,  for  the  final  satis- 
faction which  is  assured  hv  a g'ondls  always  identical  with  the  first  which  would 
be  lost  without  the  good.  In  the  text  I have  put  the  formula  in  such  a way 
that  it  will  sufficiently  embrace  either  method. 

^ On  certain  far-reaching  complications  which  may  be  connected  with  this, 
see  Conrad’s  Jahrhucher,  vol.  xvi:  p.  34. 

^ The  latter  occurs  only  with  individual  goods,  or  with  those  particular 
goods  which  may  liave  chanced  to  be  selected  just  for  the  most  insignificant 
service. 


156 


COMP  Lie  A LIONS 


BOOK  in 


sack  of  corn — and  therefore  the  value,  for  instance,  of  the  first 
sack — was  determined  by  the  utility  of  another,  the  last  sack 
of  corn,  but  always  by  the  utility  of  a sack  of  corn.  The 
existence  of  organised  exchange,  however,  may  cause  consider- 
able coinpIicatiouB  here.  In  making  it  possible  to  exchange 
goods  of  one  kind,  without  loss  of  time,  for  goods  of  another 
kind,  it  also  makes  it  possible  to  shift  a loss,  which  occurs  in 
one  kind  of  goods,  over  to  another  kind.  Instead  of  replac- 
ing the  loss  of  an  individual  good  by  withdrawing  another 
good  of  the  same  kind  from  a less  important  employment, 
and  leaving  there  a vacancy,  we  may  summon  goods  of 
entirely  different  kinds  from  tlie  occupation  in  which  they 
have  previously  been  employed,  and,  by  way  of  barter,  procure 
the  good  required  to  supply  the  loss.  What  is  here  lost  in 
losing  a good  of  class  A is  really  the  utility  which  the  goods 
taken  from  class  B would  otherwise  have  afforded ; and  since, 
of  course,  we  should  not  think  of  taking  the  replacing  good 
from  the  more  important  but  from  the  least  important  employ- 
ments in  their  spheres  of  utility,  the  loss  comes  upon  t.Ke 
marginal  utility  of  the  foreign  good.  tha,t  transferred  from  class. 
E to  class  A.  Here,  therefore,  the  marginal  utility  and  the 
value  of  a good  of  one  kind  is  measured  by  the  marginal 
utility  of  a good  of  another  kind — by  the  good  (or  portion  of 
goods)  devoted  to  replace  it. 

To  illustrate  this.  My  only  overcoat  has  been  stoleni^f" 
There  is  no  question  of  replacing  it  directly  by  another  coat  o:^ 
the  same  kind,  because  I had  only  the  one.  But,  all  the 
same,  I shall  not  willingly  let  the  loss  caused  me  by  the  theft 
rest  where  it  originally  fell.  For  the  want  which  now  makes 
itself  felt — that  of  warm  winter  clothing — is  a very  urgent 
one ; its  non-satisfaction  may  involve  the  most  serious  conse- 
quences to  my  health,  and  even  endanger  my  life.  .1  shall 
accordingly  try  to  shift  the  incidence  of  the  loss  on  to  other 

kinds  of  goods,  and  I shall  do  so  by  parting,  in  exchange  for  a 
new  overcoat,  with  goods  which,  in  other  circumstances,  woidd 
have  been  put  to  other  uses.  The  goods  needed  for  this  ex- 
change I shall,  naturally,  withdraw  from  those  uses  which  are 
of  least  consequence  to  me ; that  is  to  sav.  I shall  take  the 
goods  which  are  of  least  marginal  utility  to  me.  If  I am  well 
off  I sliall  probably  take  the  £3,  the  price  of  a new  greatcoat, 


CHAP.  V 


THE  SUBSTITUTIONARY  UTILITY 


157 


out  of  my  cash-box,  and  I shall  be  able  to  buy  oue  luxury  the 
less  with  my  diminished  funds.  If  I am  not  weU  off,  but  am 
not  exactly  a poor  man,  1 shall  have  to  fill  up  the  deficit  in 
the  cash-box  by  economising  on  my  house-keeping  expenses 
for  a couple  of  months.  If  I am  so  poor  that  I neither  have 
the  money  nor  can  save  it  out  of  my  monthly  income,  I may 
have  to  sell  or  pawn  some  articles  of  furnitnrp., which  can  be 
most  easily  dispensed  with.  Finally,  if  I am  so  far  reduced 
that  I can  provide  only  for  the  most  urgent  concrete 
wants  in  all  the  other  classes,  then  I cannot  shift  the  loss  to 
other  classes  of  wants,  and  needs  must  get  along  without  an 
overcoat. 

If  we  put  ourselves  for  the  moment  into  the  position  of 
the  owner  of  the  overcoat,  and  ask  what  it  is.  as  regards  his. 
wellbeing,  that  depends  on  the  coat  being  stolen  or  not,  we 
shall  tind  that  the  dependent  circumstance  is,  in  the  first 
case,  the  spending  of  money  on  some  luxury ; in  the  second, 
some  little  curtailments  in  house-keeping ; in  the  third,  de- 
privation of  the  utility  of  the  goods  sold  or  pawned ; in  the 
fourth,  the  actual  preservation  of  health.  Only  in  the  last 
case,  therefore,  is  the  value  of  the  coat  determined  by  the 

immediate  marginal  utility  of  its  own  class. (which  marginal 
utility  here  happens  to  coincide  with  the  utility  of  the  good 
itself  because  the  class  is  represented  by  a single  individual) ; 
in  aU  the  other  cases  it  is  determined  by  the  marginal  utility 
of  foreign  classes  of  goods  and  wants. 

Under  the  present  econouno  system,  where  exchange  is 
very  highly  organised,  a notable  importance  attaches  to.  the 
casuistical  modification  we  have  just  descriheal.  We  might 
almost  say  that  it  includes  the  majority  of  subjective  estimates 
of  value.  For  reasons  which  may  be  easily  inferred  from 
what  has  been  said,  we  scarcely  ever  value  goods  that 
are  indispensable  to  us  bv  their  direct  utility.,  but,  almost 
always,  according  to  the  “substitutionary  utility”  of  foreign 
classes  of  goods.  I should  say,  however,  empluitically  that, 
even  where  exchange  is  most  highly  organised,  we  do  not 
always  have  occasion  to  employ  this  latter  method  of  valuation  ; 
it  is  only  under  certain  conditions,  although  of  course  con- 
ditions that  very  often  occur.  That  is  to  say,  we  employ  the 
“substitutionary”  method  only  when  the  marginal  utility  of 


158 


COM  PLICA  TIONS 


BOOK  III 


flip,  rpplaciiig  good  is  less  than  the  immediate  marginal  utility 

of  the  class  into  which  it  is  transferred to  put  it  more 
exactly,  when  the  prices  of  goods,  and,  at  the  same  time,  the 
circumstances  of  provision  for  the  various  kinds  of  wants,  are 
such  that,  if  a loss  occurring  in  one  kind  were  borne  inside  the 
kind  itself,  wants  relatively  more  important  would  go  unsatisfied 
than  if  the  purchase  price  of  the  replacing  good  were  drawn 
from  other  kinds  of  wants.  But  through  all  complications  it 
is  always  the  lemt  utility,  mediately  or  immediately  depend  put 

on  a good,  that  determines  its  true  marginal  utility  and  value. 

Casuistical  complications  similar  to  those  made  possible  by 
exchange  may  be  caused  by  the  fact  that  replacing  goods  can 
be  quickly  obtained  by  production.  This  kind  of  complication 
also  has  a very  notable  place  in  the  theory  of  value,  from  the 
fact  that  it  gives  the  kev  to  the  influence  of  cost  of  production 
on  value.  It  requires,  on  that  account,  particularly  careful 
treatment.  But  it  will  be  more  appropriate  to  give  an  inde- 
pendent consideration  to  this  and  to  certain  other  casuistical 
complications  somewhat  later,  and  to  return  meantime  to  the 
simple  fundamental  law,  the  statement  of  which  requires  to  be 
supplemented  in  a particular  direction. 


CHAPTER  VI 


WHAT  DETERMINES  MARGINAL  UTILITY 

Thus,  far  we  have  traced  the  amount  of  value  which  goods 
possess  to  the  amount  of  their  marginal  utility.  We  may, 
however,  pursue  the  causes  which  determine  value  one  step 
I'arther  back,  and  ask  on  what  circumstances  the  amount  of  this 
marginal  utility  itself  depends.  The  answer  is ; — on  the  rela- 
tion between  Wants  and  their  Provision.  The  way  in  which 
these  twolactors  influence  the  amount  of  marginal  utility  has 
been  suggested  so  often  and  so  fully  in  the  foregoing  analysis, 
that  I need  not  say  anything  further  in  way  of  explanation. 
I shall  content  myself  with  shortly  formulating  the  law  relating 
to  it.  It  runs  thus:  the  mo^e  cnmjrphensive  and  tl]f.  more- 
intense  the  want,  the  higher  the  marginal  utihty.  and  vice  versd: 

That  is  to'  say,  the  more  numerous  and  the  more  intense  the 
wants  demanding  satisfaction  on  the  one  hand,  and  the  less  the 
quantity  of  goods  available  to  satisfy  them  on  the  other  hand, 
the  more  important  are  the  layers  of  want  that  must  remain 
unsatisfied,  and  the  higher,  therefore,  the  marginal  utility. 
And  conversely,  the  fewer  and  the  less  urgent  the  wants, 
and  the  more  goods  there  are  to  satisfy  them,  the  deeper 
down  the  scale  goes  the  satisfaction,  and  the  lower  falls  the 
marginal  utility  and  the  value.  It  comes  nearly  to  the 
same  thing,  only  in  a less  precise  form,  to  say : Trsefalness 
^d  Scarcity  are  the  ultimate  determinants  of  the  value 

nf  _gi7orls  In  so  far  asC|he  degree  of  jisefulness  inLdic9,tes 
whether,  in  its  way,  the  good  is  capable  of  more  or  less 
important  services  to  human  weilbeing,  so  far,  at  the  same 
time,  does  it  indicate  the  height  to  which  the  marginal  utility, 
in  the  most  extreme  case,  mav  rise.  .Rut  it  is.  the  scarcity 


160  WHAT  DETERMINES  MARGINAL  UTILITY  book  iii 


that  decides  to  what  point  the  marginal  utility  actually  does 

rise  in  the  concrete  case.^ 

^ In  his  recently  published  essays  on  Wcrtlithcorien  nnd  JFcrtligesetzc  (Conrad’s 
Jahrbucher,  N.  F.,  vol.  xvi.  pp.  417-437,  and  513-562)  Scharlina;  will  not  allow 
that  the  relation  of  Wants  and  Provision  is_th^ultimate  universal  determinant  of 
the  value  of  goods,  and  would  substitute  Difficnltv  of  Attainment  in  its  place 
{ibid.  p.  425,  and  particularly  p.  430  in  note,  and  p.  551).  Notwithstanding 
some  striking  things  in  it  I frankly  confess — and  all  the  more  frankly  that  I 
attach  so  much  scientific  importance  to  the  Danish  economist,  and  so  much 
weight  to  anything  he  says — that  I consider  not  only  this  proposition,  but  the 
whole  treatise  he  has  written  in  its  proof,  as  a lamentable  relapse  in  scientific 
analysis^  Scharling  has  done  everything  possible  to  re-entangle  certain  things 
that  had  up  till  now  scarcely  escaped  from  confusion.  And  what  makes  it  worse 
is  that  he  has  done  it  with  skill,  and  with  a certain  semblance  of  truth.  I con- 
sider “ difficulty  of  attainment  ” one  of  those  unlucky  catch-words  which  can  be 
stretched  and  stretched  like  an  indianibber  band  ; it  leads  out  of  one  ambiguity 
into  another,  and  it  either  explains  things  falsely  or  does  not  explain  them  at  all. 
I mean  that  either  one  connects  with  it  a definite,  limited,  and  narrow  meaning, 
and  holds  fast  by  that — in  which  case  the  explanations  that  one  would  base  on 
this  narrow  conception  prove  to  be  positively  false  ; or  one  draws  and  stretches 
the  rubber  band,  and,  by  making  perverted  and  violent  constructions,  forces  all 
sorts  of  foreign  things  under  the  elastic — in  which  case  we  avoid  open  contra- 
diction, but  at  the  cost  of  making  the  proposition  expressed  by  the  catch-word 
an  insipid  and  weak  phrase,  which  does  not  explain,  but  goes  round  about  an 
explanation.  And  just  this  has  been  Scharling’s  fate.  What  does  he  mean  by 
“difficulty  of  attainment  ” ? He  explains  it  as  the  amount  of  effort  that  every 
one  must  take  on  himself  to  obtain  a g5od7~or  the  effort  which  is  spared  him  by 
the  possession  of  the  good  fp.  430).  And  what  does  the  word  “effort,”  again, 
mean  ? If  any  precise  conception  is  to  be  attached  to  it,  it  can  scarcely  be  under- 
stood as  anything  else  than  as  some  sort  of  exertion,  pain,  or  labour.  But  if  this 
is  the  meaning  attached  to  it  then  the  appeal  to  “saved  effort,”  as  the  principle 
of  the  value  of  goods,  is  positively  false.  To  give  one  example  out  of  a thousand, 
take  the  case  of  a pensioner  past  work  with  an  income  of  ^60.  He  is  told  to 
value  the  overcoat  which  he  possesses  according  to  “saved  effort.”  What  kind  of 
effort  may  that  be  ? Perhaps  the  effort  which  he  would  have  to  expend  to  produce 
the  overcoat  himself?  Certainly  not ; he  would  never  himself  make  the  coat,  but 
always  buy  it.  Or  the  eft’ort  which  he  would  have  to  put  forth  if  he  were  to  pro- 
duce those  goods  which  he  had  to  give  away  as  equivalent  for  the  coat  ? Neither 
can  this  be  the  case  ; for,  past  work  as  he  is,  he  would  never  acquire  this  purchase 
price  through  effort,  but  simply  take  it  from  his  income,  and  for  that,  of  course, 
he  must  curtail  the  satisfaction  of  other  less  important  wants.  What^  therefore. 
the  possession  of  the  overcoat  snares  him  is  not  an  effort,  but  a deprivation,  and 
a deprivation  the  amount  of  which,  as  I have  indicated  in  the  work  disputed  by 
Scharling,  depends  exactly  on  the  importance  of  those  last  needs  which  are  satis- 
fied by  the  good,  which  lose  their  satisfaction  in  losing  it,  and  the  urgency  of 
w^hich  itself,  again,  is  determined  by  the  existing  relation  of  Wants  and  Provision. 
It  is  only  in  those  rare  cases  mentioned  by  me  in  Conrad’s  Jahrbiicher  {ibid.  p.  42) 
— the  exceptional  character  of  which  I most  distinctly  maintain  in  spite  of 
Scharling’s  remarks  (p.  430,  note  11— that  the  amount  of  an  effort  or  the  pain  of 
labour  can  he  the  immediate  standard  of  value. — Now  I admit  that  Scharling 


CHAP.  VI  RELATION  OF  WANTS  AND  PROVISION 


161 


This  proposition,  that  the  height  of  marginal  utility  is 
determinerl  hy  thp  rplatlmis  of  Wants  and  Provision,  arlmits  ^ 
a great  Dhrnher"(Trusi^uT  applications.  Just  now  I shall  only 
emphasise  two  of  these,  wliich  we  shall  have  to  make  use  of 
later  on  in  the  theory  of  objective  exchange  value,  first,  since 
the  relations  of  Wants  and  Provision  among  individuals  are 
extremely  various,  one  and  the  same  good  may  possess  an 
entirely  distinct  subjective  value  for  different  persons — without 
which,  indeed,  it  is  difficult  to  see  how  there  coidd  be  any 
exchanging  at  all.  And  thus,  second,  under  otherwise  .similar 
circumstances,  the  same  quantities  of  goods  have  a different 
value  to  rich  and  poor ; to  the  rich  they  have  a smaller,  to  the 
poor  a larger  value.  The  rich  being  amply  supplied  with  all 
classes  of  goods,  their  satisfaction  extends,  generally  speaking, 
to  the  more  unessential  wants,  and  the  added  or  deducted  satis- 
faction dependent  on  any  particular  good  is,  consequently, 
inconsiderable ; while  to  the  poor  man,  who  is  generally  able 
to  provide  for  only  his  most  urgent  wants,  the  utility  which 
depends  on  each  good  is  much  greater.  Experience  also 
shows  that  poor  men  find  it  a pleasant  thing  to  acquire  goods 

and  a painful  thing  to  lose  them,  where  a similar  gain  or  loss 
does  not  affect  the  rich  at  all.  We  would  scarcely  compare 
the  state  of  mind  of  a poor  clerk,  who  received  his  month's 
salary  of  £5  on  the  first  day  of  the  month  and  lost  it  on  his 
way  home,  with  that  of  the  millionaire  who  dropped  the  same 
sum.  To  the  former  the  loss  would  mean  most  painful  priva- 
tion over  a whole  month ; to  the  latter  it  would  only  invoh'e 
the  want  of  some  idle  luxury. 

sometimes  gives  the  word  “eS'ort  ” quite  another  meaning  from  that  of  a pain. 
To  avoid  repetitions,  however,  I will  show'  what  that  leads  to,  a little  later,  under 
the  theory  of  price. — Finally,  the  illustration,  with  which  Scharliiig  thinks  he 
has  signally  refuted  my  doctrine,  will  not  mislead  any  one  who  has  rightly  under- 
stood the  doctrine  of  marginal  utility.  If  a boy,  who  hitherto  had  only  had  a 
single  apple,  were  allowed  for  once  to  pull  as  many  apples  as  he  liked  in  a 
neighbour’s  garden,  he  would,  I admit,  immediately  reduce  the  value  he  put  upon 
the  good  called  “ apple.”  But  why  ? Not,  as  Scharling  thinks  he  may  assume  as 
self-evident,  because  “ his  relish  and  his  enjoyment  in  consuming  the  fruit  remain 
unchanged.”  This  enjoyment  may  run  down  a whole  graduated  scale  from  the 
consumption  of  the  first  and  single  apple  to  entire  satiation  with  apples,  but  it  is 
perfectly  clear  that  tbe  boy  with  the  single  apple  sacrifices  the  enjoyment  which 
stands  highest  in  this  scale,  while,  “ with  one  of  many  apples  to  choose  from,”  he 
sacrifices  only  a very  trifling  one. 


CHAPTEE  VII 


ALTERNATIVE  USES 

In  the  present  and  following  chapters  of  this  book  we  shall 
continue  the  discussion  of  various  casuistical  comphcations 

which  arise  in  practical  life  in  the  formation  of  value.  We 
must  go  into  these  for  two  reasons  : first,  in  order  to  put  on 
a surer  foundation  the  perfect  agreement  of  our  theory  of 
value  with  the  phenomena  of  actual  life,  and,  second,  because 
the  conclusions  arrived  at  now  will  find  important  applicationa 
later  when  we  come  to  the  theory  of  capitaJ. 

It  often  happens  that  a commodity  permits  of  being 

employed  or  used  in  two  or  even  several  eutirely  difFp.rp.nt  ways. 
Wood,  for  instance,  can  be  used  for  burning  or  for  building; 
grain  for  bread,  for  seed,  or  for  distilling ; salt  as  a relish,  or 
as  an  auxiliary  material  in  the  making  of  chemicals.  Since, 
then,  in  each  different  employment  the  commodity  supplies 
different  wants,  and  these  wants  have,  of  course,  different 
degrees  of  importance ; since,  further,  in  these  different  classes 
of  wants,  the  relations  of  want  and  its  provision  are  frequently 
dissimilar ; and  since,  finally,  the  good,  if  it  possesses  a complex 
usefulness,  does  not  usually  possess  this  usefulness  in  the  same 
degree  at  all  times, — on  all  these  grounds  it  is  easy  to  .gee  that, 
the  increment  of  utility  which  a good  causes,  or  the  marginaJ 
utility  which  it  rrm.v  afford,  may  vary  very  greatly  from  one 
pm  piny  merit  tn  ^nnthp.7-  For  instance,  it  may  very  well  be 
that  a pile  of  boards,  used  for  building  material,  affords  its 
owner  a marginal  utility  that  may  be  indicated  by  the  figure 
8,  while  the  same  boards,  used  as  fuel,  would  only  afford  a 
marginal  utility  indicated  by  the  figure  4.  The  question  now 
is : In  Auch  cases  which  is  the  true  economical  marginal  utility 
that  determirips  the  value  of  the  good  ? 


CHAP.  VII 


THE  HIGHEST  MARGINAL  UTILITY 


163 


The  answer  is  easy  enough . it  is  always  the  highest . 
marginal  utility.  As  has  been  already  shown  at  length/  the 
true  marginal  utility  of  any  good  is  identical  with  the  least 
utility  which  it  may  be  employed,  economically,  in  proAuding. 

If,  then,  several  mutually  exclusive  employments  compete  for 
any  particular  good,  it  is  clear  that,  in  any  rational  scheme  of 
economy,  the  most  important  among  them  will  get  the  prefer- 
ence ; it  alone  is  economically  permissible : all  less  important 
uses  are  excluded ; and,  as  the  good  cannot  be  used  in  these 
employments,  they  can  have  no  influence  on  the  value  set  upon 
it.  To  put  it  in  terms  of  our  concrete  example.  If  a peasant, 
after  using  his  stock  of  wood  to  provide  for  all  the  more  urgent 
wants  of  building  and  fuel,  has  still  two  uses  for  wood — two 
employments  to  which  he  could  profitably  put  it — indicated  by 
the  numbers  8 and  4,  but  has  only  one  pile  of  boards  remain- 
ing, it  is  clear  that  he  will  apply  them  to  the  more  important 
of  the  two  uses,  and  leave  the  less  important  unprovided. 

So  long  as  he  can  get  a utility  indicated  by  8 in  building, 
he  will  not  burn  the  wood  to  get  a utility  indicated  by  4. 
'V^^lat  depends,  then,  on  his  having  or  not  having  that  particular 
pile  of  boards,  is  the  obtaining  or  not  obtaining  of  the  greater  ^ 
utility  8.  We  may  put  the  rule  in  general  terms  thus  i in 
the  case  of  goods  which  allow  of  alternative  usesor  employ-  , 
ments,  and  are  capable  of  furnishing  diflerent  marginal  utilities 
in  these  uses^  that  employment  which  yields  the  highe^  marginal 
utilitvAs~the  standard  for  the  exionomical  value  of  the  gpods. 

This  5e~ found  amply  confirmed  by  experience. 

ISTobody  would  price  oak  furniture  at  its  value  ah  fuel,  or  sell  a 
fine  picture  for  the  price  of  old  canvas,  nr  estimate  a lady’s 
hunter  by  its  capacity  to  draw  a butcher’s  cart ! 

The  formula,  however,  as  now  stated  might  easily  give  rise 
to  mistakes,  and  it  will  be  advisable  to  anticipate  these  before 
going  further.  It  might  seem  as  if  what  I have  just  said  was 
contradictory  of  what  was  said  a little  ago.  I now  sav  that. 
among  several  alternative  employments  having  different  marginal 

utilities,  the  highest  is  the  standard,  while  a few  pages  ago  it 
was  demonstrated  that,  if  the  immediate  marginal  utility  of  a 
good  (say  the  utility  of  the  last  good  of  its  own  class)  was 
greater  than  its  mediate  marginal  utility  (say  the  marginal 
^ See  above,  p.  147. 


164 


ALTERNATIVE  USES 


BOOK  HI 


Utility  of  goods  of  another  class  employed  as  substitutes),  the 
lower  marginal  utility  was  the  standard.^  The  seeming  con- 
tradiction is  very  simply  explained.  In  the  former  case  we 
were  dealing  with  a distinction  between  several  ways  in  which 
a stock  of  goods  could  be  employed ; now  we  are  dealing  with 
a distinction  between  two  or  more  employments  for  which  the 
stock  of  goods  is  not  sufScient.  and,  as  I have  already  shown  ^ 
on  a former  occasion,  the  least  of  those  uses  to  which  a good 
is  put  always  coincides  exactly  with  the  greatest  of  those  uses 
which  fail  of  provision  if  there  is  no  such  good. 

When,  then,  in  the  above  formula  I spoke  of  several  alterna- 
tive employments  and  of  alternative  marginal  utilities,  it  must 
be  understood  as  a method  of  expression  which,  literally  speaking, 
is  not  quite  correct.  For,  naturally,  of  those  competing  employ- 
ments only  one  cail,  economically,  be  the  last ; pnly  nnp  there- 
fore, can  be  the  true  “ marginal  employment  ” — that  in  which 
we  find  the  marginal  utility — while  all  the  other  employments 
are,  economically,  inhibited.  They  make  the  more  demand  on 
our  attention,  however,  as  being  the  first  or  most  conspicuous 
representatives  of  an  entire  branch  of  employment.  As  soon 
as  we  think  of  this  latter  branch  at  all,  these  representatives 
force  themselves,  in  the  first  place,  on  our  consideration,  and 
it  is  by  choosing  between  them  that  we,  as  it  were,  give  a casting 
vote  for  one  among  entire  groups  of  employment,  such  as 
carving  and  burning  of  wood,  hacking  and  knacking  of  horses, 
and  so  on — an  actual  psychological  procedure  which  appears  to 
me  best  and  most  concisely  indicated  by  the  above  formula. 

Here,  however,  it  must  be  emphasised  that  the  precedence 
given  in  the  course  of  our  inquiry  to  those  pseudo-marginal 
employments  is  only  formal : in  our  economical  decisions  they 
enjoy  no  sort  of  material  preference.  Generally  speaking, 
the  fact  that  th^  employments  to  which  a good  mau  he^ynt. 
fall  into  several  distinct  branches  has  really  not  the  slightest 
influence  on  our  calculations  pL  value.  Just  as  we  do  not  value 
goods  according  to  kinds  of  wants,®  so  we  do  not  distribute 
them  according  to  tranches  of  employment.  Every  concrete 
employment  is  only  looked  on  as  a possible  employment 
according  to  the  rank  which  it  maintains  in  virtue  of  its 
importance  among  all  competing  employments  of  every  branch. 

' See  above,  p.  157.  ^ See  above,  p.  154  in  note  2.  ® See  above,  p.  142. 


CHAP.  VII 


THE  PSEUDO-MARGINAL  UTILITY 


165 


And  thus,  in  obedience  to  the  principle  of  economic  conduct, 
we  always  follow  one  and  the  same  course ; we  ^ocate  our 
stock  of  p-Qods  among  the  concrete  uses  which  are  of  most 

importance_Qm-aur  sca^  and  the  lagt^  of  these  determines  for 

us  the  marginal  utility  andPtE^alue  of  the  good^ 

Now  in  doing  so  it  will  often  happen  that  only  one  single 
branch  of  employment  is  taken  into  consideration.  This  will 
of  course  be,  quite  regularly,  the  case  where  we  have  only  a 
single  individual  commodity  to  dispose  of.  But  it  will  also 
happen  where  a whole  series  of  concrete  employments  of  one 
kind  outweighs  that  of  another  kind  in  importance,  and  where, 
at  the  same  time,  this  series  is  long  enough,  or  the  available 
stock  of  goods  is  small  enough,  to  leave  no  provision  for_  em- 
ployments of  less  importanc.e.  If,  for  instance,  in  any  branch 
of  industry,  there  are  a hundred  opportunities  of  employing 
certain  goods,  and  the  importance  of  each  opportunity  is  indi- 
cated by  the  figure  8,  while  the  opportunities  in  another  branch 
of  employment  are  indicated  only  by  the  figure  6,  and  if  our 
stock  of  goods  consists  of  fifty  individual  commodities  only, 
naturally  all  the  fifty  will  be  devoted  exclusively  to  the-fixst, 
kind  of  employment,  and  their  value  will  be.  fixed,  ar-cnrHir^g 
to  the  highest  utility,  at  8.  But  often  it  will  happen  that 
wants  representing  different  branches  of  employment — say,  for 
instance,  timber  wanted  for  building  and  for  burning — demand 
satisfaction  simultaneously ; in  such  eases  it  is  the  ratio  that 
chances  to  exist  between  the  opportunities  and  the  goods  that 

decides  to  what  branch  of  want  the  “ last  ” employment  will 
belong ; that  is  to  say,  the  employment  which  determines  the 
value.  Suppose  that  in  one  branch  of  employment  there  are 
four  opportunities,  indicated,  according  to  importance,  by  the 
figures  10,  8,  6,  4;  and  that  in  another  branch  there  are 
four  opportunities,  indicated  by  the  figures  9,  7,  5,  3 ; and 
suppose  that  a man  possesses  in  all  five  individual  goods ; 
there  is  no  doubt  that  the  five  goods  will  be  allotted  to  the 
opportunities  10,  9,  8,  7,  6,  and  that  the  last  figure  (which, 
accidentally,  belongs  to  the  first  branch  of  employment')  is  the 
real  marginal  utility  and  deternnines  the  value  of  the  good, 
while  the  employment  that  comes  next  in  the  second  branch, 
that  indicated  by  the  figure  5,  must,  according  to  our  formula, 
become  the'  “ pseudo-marginal  utility.” 


CHAPTER  VIII 


SUBJECTIVE  EXCHANGE  VALUE 

We  are  now  ready  to  consider  a concrete  application  of  what 
has  just  been  said,  and  one  that  lies  at  the  root  of  a very  wide- 
spread phenomenon.  Hitherto  we  have  mostly  had  before  us 
cases  where  a commodity,  in  virtue  of  some  technical  adapta- 
bility pecuhar  to  it,  becomes  susceptible  of  being  employed  in 
various  ways.  Quite  apart  from  any  such  special  assumption, 
however,  the  existence  of  an  organised  system  of  exchange 
gives  almost  nvery  good  a second  kind  of  eTnpInympjit, — that 
of  being  bartered  for  other  goods.  It  is  customary  to  put  this 
against,  and  in  opposition  to,  all  other  kimls  of 'umployiirent, 
and  to  associate  this  opposition  betweeiVHJ^’^d  “Exchange” 
with  a division  of  value  into  “Use  Value”  and  “Exchange 
Value.” 

Understood  in  a certain  sense,  to  which  in  this  place 
we  shall  adhere,  both  of  these — exchange  value  as  well  as 
use  value — are  kinds  of  subjective  value.  Use  value  is 
the  importance  which  a good  obtains  for  the  welfare  of  a 
person,  on  the  assumption  that  it  is  used  immediately  in 
furthering"hTs  wellbeing;  and,  similarly,  exchange  value  is  the 
importance  which  a good  obtains  for  the  welfare  of  a person 
through  its  capacity  to  procurj^.  other  goods  by  wavj)f  barter. 
The  amount  of  use  value  is  measured,  according  to  rules 
already  known  to  us,  by  the  amount  of  the  marginal  utility 
which  the  good  in  question  brings  its  owner  when  used  by 
himself.  The  amount  of  (subjective)  exchange  value,  on  the 
other  hand,  obviously  coincides  with  the  ammint-.  nf  tbp  nsp 
value  of  the  goods  got  in  exchange.  When  I employ  a good 
by  bartering  it  I procure  for  my  welfare  exactly  what  the 


CH.  VIII  A SPECIAL  CASE  OF  ALTERNATIVE  USES 


167 


goods  I get  iu  exchange  procure  for  me  in  utility.  Tlie 
amount  of  the  good’s  subjective  exchange  value,  therefore,  is 

to  be  measured  by  the  marginal  utility  of  the  goods  got  in 
exchange  for  it. 

Now  nothing  is  more  common  than  that  the  use  value  and 
the  exchange-^alue-of  a good  to  its  owner  are  of  unep[u^ 

amount.  To  a scholar,  for  instance,  the  use  value  of  his  books 
would,  as  a rule,  be  considerably  greater  than  their  exchange 
value,  while  to  the  bookseller  the  contrary  is  likely  to  be  the 
case.  The  question  now  recurs.  Which  of  the  two  values  in 
such  cases  is  the  true  one  ? ^ 

Here  we  have  only  to  deal  with  a special  case  out  of  a 
group  for  which  we  have  already  laid  down  the  general  rule. 
Employment  in  personal  use  and  employment  in  exchange  are 
two  different  ways  of  employing  one  good.  If  the  good 
affords  a different  marginal  utility  in  each  employment,  it  is 

the  higher  utHitv  that  gives  the  standard  forntsTsconomical 
value,^  If.  therefore,  the  use  value  and  the  exchange^vulue  of 
aTgood  are  different  in  amount,  the  higher  of  them  is  its  true 
value.  We  recognise  this  principle  in  practical  life.  We 
always  employ  our  goods  in  that  which  corresponds  to  the 
higher  and  the  true  value.  The  scholar  keeps  his  books  ; the 
bookseller  sells  his^  Or,  if  the  scholar  gets  into  reduced  cir- 
cumstances, he  also  sells  his  books ; but  in  this  case,  while  the 
use  value  and  also  the  objective  exchange  value  of  the  books 
remain  unaltered,  their  subjective  exchange  value  to  him  has 
risen.  That  is  to  say,  there  are  now  more  urgent  wants  of  other 
classes  clamouring  in  vain  for  satisfaction,  and  the  possibility 
of  satisfying  these  other  wants  through  the  sale  of  the  books 
acquires  for  him  an  increased  importance,  and  an  importance 
that  easily  outweighs  the  use  value  of  the  books. 

The  recognition  that  there  is  a subjective  exchange  value. 

and  that  this  is  something  entirRly^istirTctrfrnm  what  is  usnallv 
called  exchange  value  (that  is,  objective  exchange  value),  is  of 

1 It  is  easy  to  see  that  we  can  only  speak  of  two  values  in  the  same  loose  way 
as  we  spoke  above  of  several  “ alternative  marginal  employments,”  for,  naturally, 
a good  can  never  have  anything  ^but  one  value  to  a person.  Valnp  is  yVip 
importance  gl^ip.li  g^nnrl  has  for  the  wellbeing  of  a man,  and  this  importance 
cannot  be  at  the  same  time~~greaL  and  smallydii^er  or  lower.  But  we  do 
now  and  then  use  this  rather  inaccurate  way  of  thinking  and  speaking,  and, 
therefore,  I have  here,  as  on  the  former  occasion,  adapted  my  formula  to  it. 


V 


168 


SUBJECTIVE  EXCHANGE  VALUE 


BOOK  III 


fundamental  imporf.anne  in  guiding  us  among  the  phenomena  of 

value,.  It  may  be  advisable,  on  that  account,  to  devote  a little 
more  attention  to  the  subject.  The  illustration  of  the  scholar 
is  enough  to  convince  us  that  the  subjective  importance,  based 
on  the  possibility  of  barter,  may  take  a different  direction  from 
that  taken  by  the  objective  power-in-exchange  and  price  of 
goods.  For,  price  remaining  unaltered,  the  subjective  exchange 
value  of  the  goods  may  rise.  But  the  two  exchange  values 
may  even  move  simultaneously  in  opposite  directions.  Take 
the  case  of  a poor  student,  whose  last  and  sole  possession — the 
only  thing  he  can  call  his  own — is  a Jubilee  sovereign.  There 
is  no  doubt  that  this  sovereign  will  have  a high  subjective 
importance  for  the  satisfaction  of  his  own  wants ; and  there 
is  no  doubt  that  this  importance  is  an  exchange  value,  for 
sovereigns  have  no  use  value.  Now  suppose  that  our  student 
falls  heir  unexpectedly  to  a fortune  of  ten  thousand  pounds, 
while,  simultaneously,  on  account  of  the  limited  number 
issued,  the  sovereign  goes  up  from  20s.  to  40s.  How  is  it 
now  with  the  “ exchange  value  ” of  the  sovereign  ? Here  the 
difference  between  the  two  conceptions  becomes  manifest.  The 
ohiective  exchange  value,  the  current  value  of  the  coin,  luis  gone 
up  from  20s.  to  40s. ; but  the  importance  which  it  has  for  the 
satisfaction  of  its  owner’s  wants,  tbo  Rnhjp.r.f.ive  exchange  value 
of  the  sovereign,  haa,  owing  to  the  changed  relations  between 
the  student’s  wants  and  his  resources,  ij  n gn  psti  on  a 1)1  y fa  11  en . 
Yesterday  our  student  would  have  lamented  the  loss  of  the 
sovereign  as  the  loss  of  his  last  defence  against  extremest 
hunger  and  misery ; to-day,  perhaps,  he  gives  it  away  with  a 
light  heart  to  a friend  who  collects  coins.  In  spite  of  its 
increased  current  value  it  has  become  a mere  bagatelle  to  him. 

This  fundamental  and  real  difference  between  the  two  con- 
ceptions of  exchange  va.bie  is  the  principal  reason  why  we  can- 
not accept  ordinary  division  of  TTse  Value  and  Exchang-e 
■\^aliig^as  the  ultimaJg~divisiOirbrthe  total  phenomena  of  value. 
To  do  so  would  be  to  separate  related  things,  and  to  mix  up 
matters  which  are  really  so  heterogeneous  that  it  is  scarcely 
possible  to  find  a,  common  definition  for  them.  Obviously. 
.subjective  exchange  value  is  much  more  nearly  related  to  sub- 

jective use  value  than  to  objective  exchange  value.  If  we 
wish  to  find  our  way  with  certainty  among  those  phenomena 


CHAP.  VIII 


DIFFERENT  FROM  OBJECTIVE 


169 


to  which  the  name  of  “ value  ” has  been  attached,  it  is  ad- 
visable to  do  as  we  have  done  : place  objective  exchange  valne 
by  itself  on  one  side,  and  subjective  value  on  the  other  side, 
and  afterwards  separate  tlie  latter  into  subjective  use  value 
and  subjective  evcb.snap  vnbic, ' 

^ Notwithstanding  the  ohjentions  of  Diehl  (/'.  J.  Proudhon.  Seine  Lchre  und 
scin  Lcben,  vol.  i.,  Jena,  1888,  p.  109),  who  approves  of  the  “traditional  dis- 
tinction of  Use  Value  and  Exchange  A'alue,”  I must  bold  bv  evervtliing  1 have 
.said  above. 


CHAPXEE  IX 


THE  VALUE  OF  COMPLEMENTARY  GOODS 

It  very  often  occurs  that,  in  order  to  obtain  an  economic 
utility,  several  goods  require  to  r.n-opp,ratp.  in  such  a way  that, 
if  one  good  falls  out  of  its  place,  the  utility  cannot  be  obtained, 
or  cannot  be  completely  obtained.  Goods  whose  uses  thus 
supplement  each  other  we  may  follow  Monger  in  calling  (lom- 

plementary  goods.  ' Thus,  for  instance,  paper,  pen  and  ink, 
needle  and  thread,  cart  and  horse,  bow  and  arrow,  right  and 
left  hand,  gloves,  and  so  on,  are  complementary  goods.  This 
complementary  character  obtains  generally,  indeed  almost  uni- 
versally, among  productive  goods. 

It  is  easy  to  see  that  the  intimate  Co-relation  of  comple- 

mentary goods — the  co-relation  in  which  they  afford  this 
utility — will  be  reflected  in  the  formation  of  their  value. 
This  leads  to  a number  of  peculiarities,  all,  however,  occurring 
within  the  limits  of  the  universal  law  of  marginal  utility. 
In  stating  these  we  must  distinguish  between  the  value  which 
belongs  to  the  complete  group,  and  that  which  belongs  to 
individual  members  of  it. 

The  total  value  of  the  complete  group  adapts  itself,  as  a 
i/^ule,  t5  the  amount  of  the  marginal  utiljt^y  if-lc-o.QpQLIp 

of  Affordii'i£r~SA  a group.  Tf,  for  instance,  three  goods.  A,  B, 
and  C,  form  a complementary  group,  and  it  the  smallest  utility 
economically  obtainable  by  the  .joint  employment  of  these  three 
goods  amounts  to  a value  of  a hundred,  the  three  goods  A.  B, 
and~C  taken  together  will  be  worth  a hundred. 

The  only  exception  to_  this  rule  occurs  in  those  cases  where, 
he  general  principles  with  which  we  are  now  famjliar,  the 
-pr  a good  is  to  be  measured,  not  by  the  immediate 


CHAP.  IX 


HOW  DIVIDED  OUT 


171 


marginal  utOity  of  its  own,  class,  hut  by  the  marginal  utilitv 
of  other' classes  of  goods  drawn  on  to  serve  as  siihstitutos. 
In  the  speciaT'case^nder  consideration  this  will  occur  if  every 
individual  member  the  cbmplete  group  is  repl^eable  by 
purchase,  or  production.  or~~eTOn  by  taking  a si^stitute  out  of 
some  other  isolated  employment,  and  if.  at  the  aame~finie.  the 
total  sum  of  the  utility 


would 


otherwise  (in  isolation)  have  had  is  less  than  the  marginal 
utilityTHey~a&rd  as  combined.  If  the  latter,  for  instance, 
amounts  to  100,  while  the  substitutionary  value,  the  value  of 
the  three  members  individually,  is  only  20,  30,  and  40 — that 
'is  in  all  90, — the  thing  that  depends  on  the  group  of  three  is 
not  the  obtaining  of  the  combined  utility  of  100 — which  is, 
in  any  case,  assured  by  the  substitutionary  goods — but  only 
the  obtaining  of  the  smaller  utihty,  the- 90,  which  fails  of  its 
provision  when  the  members  are  taken  away  and  become 
substitutes  in  the  group.  Since,  however,  in  such  cases  the 
complementary  character  has,  properly  speaking,  no  influence 
on  the  formation  of  value,  and  the  value  is  simply  determined 
according  to  the  ordinary  laws  already  famihar  to  us,  we  need 
not  give  any  separate,  consideration  to  this.  In  what  follows, 
then,  I shall  give  particular  attention  only  to  the  normal  case, 
where  the  marginal  utility  attainable  by  goods  in  joint  employ- 

ment is.  at  the  same  time,  the  true  marginal  utilitY. 

As  was  before  remarked,  this  marginal  utility,  first  of  all, 
determines  the  united  value  of  the  whole  group.  But  in  the 
manner  in  which  this  total  value  is  divided  out  ambng~the 
single  membefs  'df'the  "^bup,  considerable  differences  emerge. 
varying  with  the  casuistical  peculiarly  of  the  case. 

First,  if  none  of  the  members  admits  of  any  use  other 
than  thg  jomf:SsL-B.nd  if.  at  the  same  time,  no  one  member^ 
which  co-opsrates  towards  the  joint  utility  can  be  replaced, 
then  one  single  member  has  the  full  total  value  of  the  group, 

and  the  other  members  are  entirely  valueless.  Suppose,  for 
instance,  I pay  five  shillings  for  a pair  of  gloves,  five  shillings 
is  the  total  value  of  the  pair.  If  I lose  one  of  the  gloves  I 
lose  the  whole  utility,  and,  with  it,  the  whole  value  of  the  pair  ; 
and  the  remaining  glove  has  no  value.  Of  cnur.se  pitber  nf  the 
ltWP-g1rtyes  equally  admits  of  either  valuation,  and  it  is  simply 
circumstances  that  decide  which  of  them  is  to  rank  as  all. 


172  THE  VALUE  OF  COMPLEMENTARY  GOODS  book  in 


and  which  as  nothing — the  glove  needed  to  complete  the  pair, 
or  the  useless  single  glove.  Cases  of  this  kind  are  relatively 
scarce  in  practical  life. 

Second,  and  mnrp.  common,  is  the  case  where  the  indi- 
vidual mernhers  of  the  group  can  afford  anothpr,  thnnph  a loss 
utility,  outside  of  their  joint  emnloyinent  Here  the  value 
of  the  single  member  does  not  lie  between  everything  and 
nothing,  but  between  the  amount  of  the  marginal  utility  which 
it  is  capable  of  affbrdm^  in  isolatibh^’as  minimuniTahcnhe 
amount  of  the  joint  marginal  utility,  after  deducting  the  isolated 
marginal  futility  of  the'oEheFniembers,  as  nTaximum.  Suppose, 
for  instanceythnJHire'e  gbdds,  3l7B,  and  C,  in  co-operation  afford 
a marginal  utility  of  100;  tliat  A by  itself  has  a marginal 
utility  of  10,  B by  itself  of  20,  and  C by  itself  of  30;  the 
value  of  A is  determined  as  follows.  If  a merchant  owns  this 
good  by  itself  he  can  get  from  it  only  its  isolated  marginal 
utility  of  10,  and  the  value  of  the  good,  accordingly,  is  only 
10.  But  suppose  he  owns  the  tohole  group,  and  is  asked  to 
seU  or  give  away  the  good  A out  of  that  group,  what  he  has 
to  consider  is  that,  with  the  good  A he  can  get  a marginal 
utility  of  100  ; without  it,  only  the  smaller  (isolated)  utility 
of  the  goods  B and  C,  that  is  20-f-30  = 50;  and  that,  ac- 
cordingly, on  the  having  or  losing  of  the  good  A depends  a 
difference  in  value  of  50.  As  complement  of  the  group  it  is, 
therefore,  worth  100  — f20-f30)  = 5Q:  as  an  isolated  good  it 

is  worth  only  1 0.^  Here  the  difference  in  value  is  not  so 
extreme  as  in  the  first  case,  but  still  it  is  very  considerable. 

Thmd,  and  more  common  still,  is  the  case  where  some 
indjyidnal  ■mprnh'p'rs  of  the  group  are  not  onlv  employed  for 
other  purposes,  hut  are,  at  the  same  time,  replaceable  hv  other 
goods  of  the  same  kind.  Bor  instance,  building  ground,  bricks, 
beams,  and  labour  are  complementary  goods  in  the  building  of 
a house.  But  if  a few  carts  of  bricks,  intended  for  the  build- 
ing, go  astray  in  transit,  or  some  of  the  labourers  engaged  for 

1 Of  nnnrsf!  in  tliia  case  also  the  peculiarities  of  the  case  dsnide  which  member. 

ia  fn  Vip  mlngrl  as  thecompleting  member  of  the  group,  and  which  as  simply 
the  isolated  piece.  If,  for  instance,  the  owner  of  the  complete  group  is  asked 
to  sell  the  good  A,  he  will  value  it  as  completing  member,  and  the  other  goods 
B and  C as  isolated  pieces.  But  if  he  is  asked  to  sell  C,  he  will  value  it  as 
completing  member  at  100  - (10  + 20)  = 70,  while  A and  B will  he  valued  as 
isolated  pieces. 


CHAP.  IX 


THE  REPLACEABLE  MEMBERS 


173 


the  job  refuse  to  work,  in  normal  circumstances  this  does  not 
in  the  least  hinder  the  obtaining  of  the  joint  utility — the  built 
house.  The  labourers  and  materials  are  simply  replaced 
others.  The  consequences  as  regards  the  formation  of  value 
are  as  follows  ; — 

I 1.  The  replaceable  members,  even  if  they  are  needed  as 
complements,  can  never  obtain  any  higher  than  their  “ substi- 
tution value  ” — viz,  the  value  conferred  by  the  utility  in  those 
branches  of  employment  from  which  the  replacing  goods  are 
obtained.j,-^  ~~ 

2 . ^This  fact  considerably  contracts  the  limits  within 
whicli  the  value  of  the  individual  good — estimated  some- 
times as  complementary,  sometimes  as  isolated  good — giay  be 
determiued.  particularly  when  it  is  a common  marketable 
good.  The  more  numerous  the  available  goods  of  any  kind, 
and  the  more  numerous  the  opportunities  of  using  them,  the 
smaller  will  be  the  difference  between  the  importance  of  that 
u^  from  which  a replacing  sample  might  be  drawn,  as  maxi- 
mum, and  the  use  next  to  it  in  rank,  in  which  a superfluous 
isolated  good  might  be  employed,  as  minimum  of  value.  If,  for 
instance,  besides  the  good  A,  which  we  shall  call  Aj,  contained 
in  the  complementary  group,  there  are  two  other  similar  goods 
A2  and  A3,  and  if  the  possible  opportunities  of  use  (outside  of 
employment  in  the  complementary  group)  possess  an  import- 
ance indicated  by  the  numbers  50,  20,  10,  and  so  on,  only 
the  uses  indicated  by  50  and  20  would  be  filled  by  the  goods 
Ao  and  A3,  and  if  one  of  these  two  were  taken  to  replace  the 
good  m utility  of  20  would  be  lost.  On  the  other  hand,  if 
the  complementary  group  were  broken  up,  and  the  good  A^ 
itself  obliged  to  seek  for  an  isolated  and  inferior  employment, 
its  only  chance  would  be  the  third,  that  indicated  by  10. 
Thus  its  value  would  always  lie  between  10  (isolated  1 and  20 
(complementary).  But  if.  instead  of  three,  there  are  a thou- 
sand goods,  and  a thousand  opportunities  of  nsiug  them  tbp 
difference  between  the  1000th  employment  (from  which  the 
good  required  to  replace  the  other  must  in  case  of  need  be 

1 To  put  it  concretely : although  a load  of  bricks  were  absolutely  indispen- 
sable to  finish  a bouse,  the  load  could  never  obtain  any  higher  value  than  that 
determined  by  the  marginal  utility  of  bricks  generally  ; that  is,  as  determined 
by  all  the  uses  to  which  bricks  generally  are  put. — W.  S. 


174  THE  VALUE  OF  COMPLEMENTARY  GOODS  book  m 


drawn)  and  the  1001st  (in  which  the  good  must  look  for 
employment  if  it  becomes  superfluous  through  the  breaking 
up  of  the  group)  will  certainly  fall  to  a quite,  insigm'ficn.nt 
amoimt. 

Now,  of  course,  it  is  not  likely  that  any  one  individual, 
within  the  limits  of  his  own  economy,  will  possess  a thousand 
goods  of  one  kind,  and  a thousand  different  opportunities  of 
employing  them.  But,  all  the  same,  the  efficiency  of  the 
influences  just  described  is  in  no  wise  annulled ; it  is  only 
the  scene  of  their  operation  that  is  changed,  from  individual 
economy  to  the  market,  and  that  in  the  following  way.  Jxu 
dividnals  buy  what  they  require,  and  sell  their  surpluses  in 

the  market.  Here,  then,  all  the  stocks  of  goods  and  all  the 
opportunities  of  employing  them  over  the  entire  field  covered 
by  the  market,  come  together.  And  now — exactly  as  before — 
everything  depends  on  whether,  in  the  market,  commodities 
and  opportunities  of  employing  them  are  scarce  or  not.  If 
the  commodity  is  very  scarce,  it  makes  a very  considerable 
difference  in  the  determination  of  price  whether  we  approach 
the  particular  good  as  buyer  or  as  seller.  For  instance, 
suppose,  as  before,  that  there  are  only  three  similar  goods,  and 
three  buyers  each  wishing  to  acquire  just  one  such  good,  with 
the  view  of  using  it  in  employments  that  will  yield  50,  20, 
and  10.  Then,  if  one  of  these  goods  be  withdrawn  from  the 
market  to  serve  in  a complementary  employment,  the  two 
remaining  goods  are  bought  for  the  employments  indicated  by 
60  and  20,  and — according  to  laws  which  will  be  explained  in 
next  book — the  purchase  price  must  be  fixed  between  1 0 and 
20,  !^ay  atAA  But  if  now  the  complementary  employment- 
fails,  and  the  tliird  good  also  is  thrown  on  the  market,  it  must 
— if  it  is  to  find  a sale  at  all — fall  to  the  buyer  who  can  get 
10  by  employing  it,  and  the  result  is  that  the  market  price  is 
in  all  cases  fixed  helovj  the  level  of  10.  Here,  then,  the  price 
— and  the  subjective  exchange  value  based  on  it — varies  not 
inconsiderably. 

If,  on  the  other  hand,  there  are  a thousand  similar  goods 
offered,  and  a thousand  buyers  demand  them,  evidently  it  will 
not  make  the  smallest  difference  to  the  market  price  whether 
there  appears  a thousand  and  first  buyer,  or  a thousand  and 
first  seller ; the  good  obtains  a price  and  value  independently 


CHAP.  IX 


THE  IRREPLACEABLE  MEMBERS 


175 


of  whether  it  finds  a place  in  the  single  complementary 
employment  or  not. 

Thus,  under  the  assumptions  now  laid  down,  the  value  of 
the  replaceable  men^ms  is  fixed  a t a p.prtq,]>  level  independently 
of  their  concrete  complementary  employment,  and  this  value 
they  have  when  we  distribute  out  the  total  value  of  the  group 
aniongTS  individual  members.  The  distribution,  then,  will 
be  made~thus : of  the  total  value  of  the  whole  group — which 
is  determined  by  the  marginal  utility  of  the  joint  employment 

this  fixed  valup  i.'s  prpvinnsly  assigriPrl  tr.  rppIgppgVilp 

members?~an(n^bp  rpmaind^r — which  varies  according  to  the 

anidunt  of  , t^e  marginal  utility — -is  reckoned tn  tbp.  non- 

replaceable  Tnembers  as  their  individual  value.  To  use  our 
old~iIIustration  again;  say  that  the  joint  marginal  utility 
amounts  to  100,  and  that  the  members  A and  B have  a fixed 
“substitution”  value  of  10  and  20  respectively,  70  must  be 
reckoned  the  individual  value  of  the  non-replaceable  good  C ; 
or,  say  that  the  marginal  utihty  of  the  group  amounts  to  120, 
the  individual  value  of  C will  be  90.^ 

Of  the  three  cases  we  have  discussed  the  last  mentioned  is 
by  far  the  most  common  in  practical  life,  and,  accordingly,  in 
the  great  majority  of  cases,  the  value  of  complementary  goods 
is  determined  according  to  the  latter  formula.  The . jnost 
important  application  of  it  is  in  the  distribution  of  the  product 

among  the  various  productive  powers  co-operating  in  producing. 

it  Almost  every  product  is  the  result  of  the  co-operation  of 
a group  of  complementary  goods  consisting  of  uses  of  ground, 
labour,  fixed  and  floating  capital.  Of  the  complementary 
members  the  great  majority  are  marketable  coumnodities.  and 
replaceable  at  wiU  ; as,  for  instance,  the  labour  of  wage-earners, 
the  raw  materials,  fuel,  tools,  etc.  Onh^  a few  of  them  are  non- 
replaceable,  nr  not  easily  replaceable ; as,  for  instance,  the 
land  on  which  the  peasant  works,  the  mine,  the  railway  hnes, 
the  factory  walls,  the  activity  of  the  undertaker  himself  with 
his  peculiar  and  high  qualifications,  and  so  on.  It  is  easy  to 
see,  therefore,  that  here  we  have  exactly  those  casuistical  cir- 
cumstances in  which  the  foregoing  formula  of  distribution 

^ If  C also  were  replaceable  by  a substitute  of  less  value  the  case  mentioned 
on  p.  170  would  emergej  and  the  marginal  utility  of  the  joint  use  would  not 
determine  the  value  of  the  complementary  group. 


176  THE  VALUE  OF  COMPLEMENTARY  GOODS  book  iii 


obtains,  and,  as  a fact,  it  is  acted  upon  in  practical  life  in  the 
I most  accurate  way.  In  actual  business  the  cnataiL.aTP,  firal. 
deducted  from  the  total  return.  If  we  look  closer,  however, 
we  shall  see  that  what  is  deducted  is  .not  all  the  msta. — for, 
if  so,  the  use  of  ground,  or  the  undertaker’s  activity,  as  both 
valuable  goods,  would  come  under  costs — but  only  the  expendi- 
/ ture  for  the  replaceable  means  of  production  with  a given 
\ substitution  value,  viz.  the  wage  of  labour,  raw  materials,  wear 
I and  tear  of  tools,  etc.  The  remainder,  under  the  name  of 
/ “ net  return,”  ^s  ascribed  to  the  non-replaceable  member  or 
‘ members : the  peasant  calculates  it  to  his  land,  the  mine- 

owner  to  his  mine,  the  manufacturer  to  his  factory,  the 

merchant  to  his  undertaking  activity. 

If  the  joint  returns  increase,  it  would  not  occur  to  anybody 

to  ascribe  the  surplus  to  the  replaceable  members ; it  is 

always  the  ground  or  the  mine  that  “ produces  more.”  And, 
similarly,  if  the  joint  returns  decrease,  nobody  would  credit 
the  “ costs  ” with  the  reduced  amount ; the  deficiency  also  is 
conceived  as  exclusively  due  to  the  diminished  productiveness 
of  the  ground  or  the  mine.  And  this  is  entirely  logical  and 
correct : on  goods  replaceable  at  any  moment  only  the  fixed 
substitution  value  is  actually  dependent ; the  entire  remainder 
of  the  joint  amount  of  utility  obtainable  depends  on  the  goods 
that  cannot  be  replaced.  * 

The  theory  of  the  value  of  complementary  goods  is  the  l^ey 

which  will  solve  one  of  the  most  important  and  difficiflt 

problems  of  political  econoTTiy — the_,problem  of  the_diS-tlib.utiQn 
of  goods  as  made  in  the  present  state  of  society,  where 
competition  is  more  or  less  free  and  prices  are  determined  by 
free  contract.  All  products  come  into  existence  through  the  co- 
operation of  the  three  complementary  “ factors  of  production,” 
labour,  land,  and  capital.  Now  our  theory,  in  showing,  how 
much  of  the  joint  product  n^  economically^  be  considered  as 

^ Not  physically.  It  would,  in  most  cases,  be  absolutely  impossible  to 
calculate  the  physical  share — how  could  one  be  supposed  to  distinguish  what 
percentage  the  material  and  what  percentage  the  artist  had  contributed  physi- 
cally to  the  making  of  a statue  ? — but  it  is  also  a matter  of  no  importance.  On 
the  other  hand  it  is,  in  most  cases,  quite  easy  to  determine  what  share  of  the 
utility,  or  of  the  value,  would  have  to  be  done  without  if  one  were  not  in  pos- 
session of  a definite  -individual  factor,  and  this  quota,  conditioned  by  the 
possession  of  one  factor,  I call  its  economical  share  in  the  total  product. 


CHAP.  IX 


ITS  BEARING  ON  DISTRIBUTION 


177 


due  to  each  of  these,  and  what  share  of  the  totaLvalue  may, 
accordingly,  be  assigned  to  each  of  them,  lays  down,  at  the 
same  time,  the  most  decisive  basis  for  determining  the  amount 

of  remuneration  which  each  of  the  three  factors  obtainsi  ~~Snd 
thus  although,  as  we  know,  capital  as  “ factor  of  production  ” 
does  not  exactly  coincide  with  capital  as  " source  of  income,” 
yet  this  gives  us  at  least  a rough  indication  of  the  way  in 
which  the  amount  of  the^three  branches  of  income — wage,  rent, 
and  interest — is  determined. 

It  does  not  indeed  do  this  quite  directly.  That  quota 
which  the  workers  receive,  and  that  other  quota  which  the 
owners  of  the  co-operating  ground  receive,  is  directly  identical 
with  wage  and  rent.  But  the  quota  which  falls  to  the 
co-operation  of  capital  is  not  interest — as,  in  theories  of  dis- 
tribution, economists  have  repeatedly  assumed  ever  since  the 
days  of  Say  with  fatal  precipitation.  It  is.  first,  the  gross 
remuneration  for  the  co-operation  of  capital ; and,  out  of 
this,  interest  is  got,  like  a'  kernel  out  of  a shell,  because,  and 
to  the  extent  t'hat.~  something  remains  over  after  deducting 
from  the  gross  remuneration  the  value  of  the  worn-out  capital. 
To  explain  how  this  is^  so  is  a problem  in  itself.  To  make 
it  quite  clear  by  an  illustration,  suppose  that  a commodity, 
produced  by  the  co-operation  of  aU  three  factors,  is  worth 
£100.  The  law  of  complementary  goods  will  carry  us  thus 
far ; it  will  enable  us  to  determine  that  the  share  of  labour 
(the  labour  directly  employed  in  the  production)  amounts 
to,  say,  £20,  that  of  ground  to  £10,  that  of  capital  to 
£7  0.  But  it  does  not  tell  us  what,  or  how  much,  of  that 
^70  remains  over  nd,  as  interest,  after  deduction  of  the  wear 
and  tear  of  capital.  On  the  contrary,  the  law  of  com- 
plementary goods  in  itself  would  rather  lead  us  to  the 
conclusion  that  nothing  remains  over.  For,  according  to  it,  it 
would  be  most  natural  to  assume  that  the  capital,  to  the 
co-operation  of  which  the  return  of  £70  is  ascribed,  and  which 
has  been  consumed  in  obtaining  that  return,  had  already  been 
valued  at  the  entire  £7 0 ; and,  if  this  were  the  case,  the 
return  to  capital  would  naturally  be  entirely  absorbed  by  the 
wear  and  tear  of  the  capital.  That  this  is  not  the  case  is,  so 
to  speak,  an  internal  matteiu^a  matter  which  plays  its  part 
inside,  the  gross  share  of  capital  determined  by  the  law  of 


178  THE  VALUE  OF  COMPLEMENTARY  GOODS  book  iii 


complementary  goods,  and  is  the  object  of  an  independent 
problem,  the  peculiar  problem  of  Interest.  But  before  we  can 
discuss  interest  there  is  still  a great  deal  to  be  explained.^ 

^ The  confusion,  so  common  in  economic  literature,  between  the  gross  share 
assigned  to  the  co-operation  of  capital  {Jtohzins)  and  net  interest,  has  been 
fully  discussed  in  my  Capital  and  Interest  (see  the  criticism  of  Lauderdale,  p;  146  ; 
of  Carey,  p.  155  ; of  Strasburger,  p.  175  ; of  Say,  p 189,  etc.)  It  will  not  be 
expected  of  me  to  give  a complete  theory  of  distribution  in  the  passing,  as 

it  were!  I purposely  refrain  from  going  deeper  into  the  subject  than  is  necessary 

for  my  special  task,  the  development  of  the  Interest  theory.  And  for  this  it  is. 
sufficient  to  sketch  only  in  the  broadest  lines  the  principles  which  limit  the 
gross  share  of  capital,  as  against  the  shares  of  labour  and  uses  of  land  that 
co-operate  with  it : our  special  task  will  be  to  lav  down  what  is  the  state  of  the 
case  as  regards  the  gross  share  of  capital.  Moreover  I hope  that  on  this  question 
of  the  shares  allotted  to  the  various  factors,  which  I am  compelled  to  treat  in  a 
very  cursory  way,  the  eagerly  expected  work  of  Wieser  will  very  shortly  shed  a 
clear  light.  (Wieser’s  Der  Naturliche  Werth,  Vienna,  1889,  appeared  while  this 
was  passing  through  the  press. — W.  S. ) 


CHAPTEE  X 

THE  VALUE  OF  PRODUCTIVE  GOODS.  VALUE  AND  COSTS 

It  has  been  almost  a commonplace  of  economical  teaching  that 
the  valne  of  gnnris  is  rAgnlatprl  hy  the  costs  of  their  prodnctioiL 

This  doctrine  has  very  seldom  been  questioned  on  grounds  of 
theory/  but  very  often  IfAvalidity  has  been  closely  hmited  by 
the  enumeration  of  exceptions/ and  insertion  of  all  sorts  of 
saving  clauses.  In  this  contracted  sphere,  however,  it  has  held 
almost  unquestioned  authority  down  to  our  own  times ; it  has 
a certain  amount  of  support  in  practical  experience,  and,  what 
is  most  serious,  it  seems  to  contradict  the  theory  of  va.bip.  jn.cq, 
put  forward.  For  “Costs  of  Production”  are  uothiTior  p.Irp 
than  the  sum  of  productive  goods  which  must  .■he  used  up  in 
the  making  of  a good — the  concrete  capital  consumed,  the 
labour  expended,  and  so  on.  Now  to  the  question  as  to  the 
ground  and  amount  of  value  which  a good  has,  our  theory 
answers : it  depends  on  the  marginal  utihty  which  a good  is 
capable  of  renderiug : that.  is  to  sav.  it  depends  on  \t?^^uture, 
employment.  But  the  other  thedry''ahswefs ; it  depends  on 
the  value  of  the  productive  goods  consumed  in  producing  it : 
that  is  to  say,  on  the  conditions  of  its  origin.  Putting  aside 
this  contradiction  for  a moment,  and  forgetting  everything  we 
have  been  taught  as  to  costs,  let  us  inquire  impartially  what 

1 Among  older  writers  it  was  disputed  by  Say.  Traite,  vol.  ii.  chap.  ix. 
seventb  edition, ”p.  404  : “ Ce  qui  nous  ramene  i ce  principe  deja  etabli,  que  les 
frais  de  production  ne  sont  pas  la  cause  du  prix  des  choses,  mais  que  cet.t.e.  cause 
est  dans  les  besoins  que  lea  prodnits  peuvent  satisfaire.”  In  more  recent  litera- 
ture wbat  M'Leod  has  said  {Elemmis  of  Political  Economy,  1858,  p.  iii)  is  worth 
notice.  But  the  matter  was  really  first  grasped  in  its  entirety  bv  Menger. 
Jevons.  and  Walras,  whose  books  mark  an  epoch  as  regards  the  whole  value 
theory,  and  of  these  again  the  work  of  Menger  was  the  most  profound. 


180 


THE  VALUE  OF  PRODUCTIVE  GOODS  book  in 


our  theory  of  maroinal  utility,  logically  carried  out^  has_tO-  say 
as  to  the  valup  of  pmrl native  g-nof1<s.  and  as  to  “costs.” 

For  the  sake  of  clearness  it  is  desirable,  before  goins 
further,  to  define  with  more  exactness  the  object  of  our  present 
inquiry,  viz.  Reductive  Goods.  As  compared  with  consump- 
tion goods  (Gemissguter),  which  directly  serve  to  satisfy  human 
wants,  all  productive  goods  have  this  common  feature — 
they  serve  tn  sati.sfy  human  wants  only  indirectly.  But  they 
differ,  again,  from  one  another  in  the  degree  of  indirectness. 
The  flour,  for  instance,  from  which  bread  is  baked,  stands 
nearer  the  final  satisfaction  of  want  by  several  degrees  than 
the  field  which  grows  the  wheat.  To  express  these  degrees — 
which  we  shall  find  to  be  of  importance  both  theoretically  and 
practically — we  shall  avail  ourselves  of  Monger’s  division  of 
goods  into  ranks.^  In  the  first  rank  we  shall  place  consump- 
tion goods — those  goods  which  serve  immediately  for  the  satis- 
faction of  wants  ; such  as  bread.  In  the  second  rank  we  place 

^ those  goods  which  assist  in  producing  the  goods  of  first  rank  — 
the  goods  which  co-operate  in  the  production  of  bread ; as  the 
flour,  the  oven,  and  the  baker’s  labour.  In  the  third  ranl^  we 
place  those  goods  which  serve  for  the  production  of  goods  of 
second  rank ; as  the  wheat  from  which  the  flour  is  ground,  the 
mill  in  which  it  is  ground,  the  building  materials  of  the  oven, 
etc.  In  the  fourth  rank  we  nut  the  means  of  production  of 
goods  of  third  rank ; as  the  land  which  gTows  the  corn,  the 
implements  used  in  cultivation,  the  labour  of  the  agricul- 
turist, the  building  materials  of  the  mill,  etc.  And  so  on  to 
the  fifth,  sixth,  and  seventh  ranks,  which  embrace  those  goods, 
the  useful  service  of  which  consists  in  producing  goods  of  the 
rank  immediately  below  them. 

On  the  lines  of  our  conception  of  value  it  must  be  self- 
evident  tha^.-a  productive  good,  like  any  other  good,  can 
only  nltto.in.- .value  for  US  through  our  recognitiom  that  im 
its  possession  or  non-possession  depends  our  gain  or  loss  of 

^ some  one,  utility,  of  some  one  satisfaction  of  want  And  it 
is  equally  self-evident  that  its  value  will  be  high  when  the 
dependent  satisfaction  is  important,  and  low  when  it  is  unim- 
portant. The  only  difference  is  that,  in  the  case  of  goods  for 
immediate  consumption,  the  good  and  ««ti,sfacti'^Ti  stancL 


' Grurtdsdtze,  p.  8. 


CHAP.  X DERIVED  FROM  VALUE  OF  PRODUCT 


181 


hpgirlq  papVi  nthpr  in  a dirp.ct,  ransal  relation  : while,  in  the 
case  of  productive  goods,  there  is  interposed,  between  them  and 
the  satisfaction  finally  dependent  on  them,  a more  or  less 
lengthy  series  of  intermediate  -m embers,  their  successive  pro- 
ducts. In  this  prolonged  connection  there  is  both  matter  and 
occasion  for  the  development  of  new  and  legitimate  relations, 
particularly  between  the  value  of  means  of  production  and 
that  of  their  products.  But  the  great  law  of  value  is  neither 
destroyed  nor  disturbed  by  these  relations.  Exactly  as  in  the 
analogous  case  of  complementary  goods  it  is  only  obscured,  as  it 
were,  by  a mass  of  details,  to  which  the  more  ample  development 
of  the  phenomena  gives  occasion.  These  details  we  have  now 
to  consider.  To  this  end  let  us  take  a typical  productive  series. 

A gnnd  for  immediate  consump<~i^n,  wln'pli  wp  ah  all  pall  A, 
is  made  from  a group  of  productive  goods  of  second  rank^- 
which  we  shall  call  Gg ; this  from  a group  of  goods  of  third 
rank,  G3 ; and  this,  finally,  from  a group  of  fourth  rank,  G4. 
For  simplicity’s  sake  assume,  first,  that  each  of  these  productive 
groups  passes  wrEEbut  loss  of  time  into  the  product  which  it 
creates,  and  that,  at  the  same  time,  this  particular  employment 
is  the  only  one  of  which  it  is  capable.  We  have  now  to  find 
out  what  is  the  relation  of  dependence  between  each  member 
of  the  above  series,  and  the  wellbeing  of  its  owner. 

"What  depends  on  the  final  member,  the  good  A.  we  already 
know.  It  is  its  marginal  utility^  Our  inquiry,  tlien,  begins 
at  the  member  Gg.  If  we  had  not  the  group  Gg  we  should 
not  have  its  product  A ; that  is  to  say,  of  the  class  of  goods  to 
which  A belongs,  we  should  have  one  fewer  than  we  should 
otherwise  have  had.  But,  as  wa_^lready  know,  one  good  less 
means  one  satisfaction  less,  and  that  the  least  satisfaction  to 
which,  economically,  one  good  of  the  stock  would  otherwise 
have  been  devoted.  In  other  words,  it  means  the  loss  of  tlie 
margin?rt  utility  of  the  product  A.  On  the  group  Go,  therefore, 
exactly  as  on  the  final  product  A itself,  depends  the  marginal 

utility  of  A.  Looking  now  at  the  next  member  we  find  that, 
if  we  had  not  the  group  Gg,  we  could  not  have  the  group  Gg 
which  is  made  from  it ; and,  as  consequence,  we  should  lose 
one  good  of  the  class  A,  or  its  marginal  utility.  On  the  group 
Ga,  then,  depends  exactly  the  same  utility  and  importance  for 
wellbeing  as  on  the  members  which  come  after  it  in  the  pro- 


182 


THE  VALUE  OF  PRODUCTIVE  GOODS  book  in 


duction  series.  The  same  thing  again  follows  in  the  case  of 
the  group  If  it  fails  us,  we,  of  course,  lose  one  of  the 

group  Gg,  which  otherwise  might  have  been  produced  from  it ; 
we  lose,  further,  one  of  thft  group  Gg,  one  of  the  class  of  good 
A,  and,  finally,  the  marginal  utility  of  A.  Thus  we  arrive  at 
the  following  general  proposition : On  all  groups  of  Means  of 
Production  of-jempter  rank  which  successively  pass  into  one 
another,  fhpyft  dppends~o]ifi  .and  the  same  gain  to  human  well- 
being;  that  is,  the  m.ar£mal  utility  of  thp.ir  final  product.  No 
one  wiU  be  surprised  at  this  result.  It  is  a foregone  conclu- 
sion that  a series  of  productions,  which  has  no  relation  to  our 
wellbeing  except  through  its  final  member,  can  neither  tend 
towards  any  other  utility,  nor  condition  any  other  utility,  than 
that  which  this  final  member  itself  conditions.  In  every 
member  of  the  chain  successively  we  hold  in  our  hand  the 
condition  of  this  final  utility,  sometimes  at  a further,  sometimes 
at  a nearer  stage  on  the  way  to  it. 

From  what  has  been  said  we  may  deduce  the  following 
general  principles  as  regards  the  value  of  means  of  production. 
First,  since  on  one  and  the  same  utility  depend  all  the  groups 
01  means  of  production  which  successively  pass  into  one 
another,  the  .^alue  of  all  these  groups  must  be  substantially 
the  same.  ^Sp.cnnd,  tbp.  amount  of  this,  their  common  value. 
is  regulated  for  all,  in  the  last  resort,  by  the  amniiut  of  the 
marginal  utilitv  ofytheir  finished  product.  I emphasise  “in 
the  last  resort.”  t^For,  thirdly,  the  value  of  each  group  has  its 
immediate  measure  in  the  value  of.  its  product,  the  succeeding 
group.  In  the  first  instance,  the  utility  and  service  of  the 
means  of  production  consist  and  exhaust  themselves  in  the 
making  of  their  product,  and,  naturally,  the  more  important 
and  more  valuable  the  product  is  for  us  when  made,  the  higher 
will  be  the  estimate  put  on  the  importance  of  this  utility,  and 
of  that  which  provides  it.  Substantially  the  third  proposition 
is  fully  covered  by  the  second,  for,  in  the  value  of  the  g.oods 
of^igher  rank^  the  marginal  utilitv  of  the  jfinal  ^jodu^  Ja 
mirrored.  From  this  marginal  utility  value  is  conducted  to 
all  the  groups  of  means  of  production,  but  the  conduction  is 
done,  as  it  were,  by  stagey  First,  and  immediately,  the 
amount  of  the  marginal  utility  stamps  itself  on  the  value  of 
the  final  product.  This  then  forms  the  measure  of  the  value  of 


CHAP.  X 


IDENTITY  OF  PRODUCT  AND  COSTS 


183 


the  group  of  goods  from  which  this  product  comes.  This  again 
measures  the  value  of  the  third  group ; and  the  third  group, 
finally,  the  value  of  the  last  group,  the  goods  of  fourth  rank. 
From  stage  to  stage  the  name  of  the  determining  element 
chaflges,  bu^  USfel'  tEe  ^ifierenTT-rrarngsrirls  always  the  same 
thing  that  acts-^^p  marginal  utility  of  the  final  product. 

Although  the  second  and  third  propositions,  then,  agree  in 
substance,  it  is  necessary  to  formu1atft-il»fe  third  explicitly.  It 
is  important  as  being  a convenient  abbreviated  formula  which 
we  use  in  practical  life  much  more  frequently  than  the  prin- 
cipal formula.  If  we  are  estimating  what  amount  of  wellbeing 
a productive  instrument  brings  us,  we  look,  naturally,  first  of 
all  to  the  product  which  we  get  from  it.  and  then,  beyond 
that,  to  the  wellbeing  which  that  product  brings  us.  If  we  do 
not  know  this,  we  must,  I admit,  go  over  the  entire  course  of 
the  conduction  of  utility,  member  by  member,  till  we  come 
finally  to  the  marginal  utihty  of  the  final  member,  the  finished 
product.  But  very  often  this  is  not  necessary.  From  previous 
consideration,  or  from  experience,  we  meet  with  some  opinion. 

aireadv  fnrmprl^  nn  the  value  of  the  products,  and,  without 
further  consideration,  we  make  this  the  ground  of  our  opinion 
as  to  the  value  of  the  means  which  produced  them.  A wood 
merchant,  buying  timber  for  cask  staves,  will  not  take  long  to 
consider  the  value  of  the  wood  to  him.  He  estimates  how 
many  staves  he  can  get  out  of  the  timber,  and  he  knows  what 
the  staves  are  worth  in  the  condition  of  the  market  at  the 
time.  Further  than  this  he  need  not  trouble  himself. 

Thus  far  we  have  formulated  these  principles  as  to  the 
value  of  means  of  production  on  purely  theoretical  grounds: 
to  some  extent,  as  postulates  of  economical  logic.  If.  now,  we 
ask  what  experience  says  to  these  postulates,  we  shall  find 

that  it  confirms  them.  Indeed  we  can  appeal  for  confirmation 
to  that  very  “ law  of  costs  ” which  is  apparently  so  hostile  to 
our  theory  of  marginal  utility.  Experience  shows  that  the 
value  of  most  goods  is  equal  to  their  “costs.”  But  costs  ” 
are  notfidjig  else  than  the  complex  of  those  productive  goods 
which  have  value — the  labour,  concrete  capital,  uses  of  wealth, 
and  so  on,  which  must -ha  p.xpftndp.rl  in  tbp.  Tna.kina  of  9 prnrlup,t 
The  weU-knowp  identity  of  costs  and  value  is  only  another 
form  of  expressing  the  identity  of  valueb^ween  groups  of  goods 


184 


THE  VALUE  OF  PRODUCTIVE  GOODS  book  hi 


oL-¥ajious  ranks  which  pass  into  one  another.  I am  quite 
aware,  of  course,  that,  as  regards  the  cause  of  this  identity, 
those  who  adopt  the  law  of  costs  usually  read  it  in  the  con- 
verse way.  While  we  say  that  the  value  of  means  of  pro- 
duction. and  therefore  the  value  of  the  costs,  is  regulated  by 
the  value  of  their  products,  the  usual  way  of  interpreting  the 
law  is~lo  say  tnat  the^value  of  products  is  determined  by  the 
value  of  their  costs — that  is,  by  the  value  of  the  means  of 
productionduT^  which  they  are  made.  Later  on  we  shall 
have  occasion  to  go  thoroughly  into  this  difference  of  opinion 
as  to  the  cause  of  the  identity.  Meantime  all  J intend  to  do 
is  simply  to  confirm  the  statement,  that  the  asserted  identity 
of  value  between  groups  of  productive  instruTnp.rits  which 
successively  pass  into  one  another — whatever  be  its  cause, — 
is  an  actual  empirical  fact. 

course  this  identity  is  not  absolute,  but  approximate ; 
^,c-/j(/t5^we  can  only  speak  of  a tendency  towards  identity  of  value. 


partly  irregular,  partly  normal. 
fact  that  production  costs  time^ 


identity  are  of  J.w.q  kinds 
Both  kinds  arise  from 


the 


In  the  long  periods  which 
often  intervene  while  goods  of  sixth  or  eighth  rank  are  passing 
gjadtTally  through  all  the  transformation  stages  into  the  finished 
consumption  good,  both  men  a.nd  things  may  change.  Wants 


rMx/  .A'^consur 


change ; the  relations  between  wants  and  their  provision 
may  change ; and,  not  less  important,  the  knowledge  of  these 
relations  may  change.  With  them,  of  course,  changes  the 
valuation  of  the  goods  at  various  stages  on  their  way  to  the 
matured  product.  It  is  easy  to  understand  that  the  fluctua- 
tions which  proceed  from  this  cause  may  be  sometimes  great, 
sometimes  small,  sometimes  upwards,  sometimes  downwards ; 
thy  are>rT^u1a.r  fluctuations.  But,  besides  these,  we  notice 
ay&i^^ence  from  complete  identity  which  is  constant  and 
^rmal.  It  is  a matter  of  observation  that  the  total  value  of 
a compip.tp.  group  of  remote  rank  lags  somewhat  behind  the 
value  of  its  product,  and  in  a definite  ratio : and  that,  indeed,^ 
the  amount  of  this  difference  in  value  is  graduated  according 
to  the  time  required  to  change  the  group  of  means  of  produc- 
tion into  its  product.  If  the  value  of  the  product,  for  instance, 
is  £100,  experience  teUs  us  that  the  total  value  of  the  labour, 
uses  of  land,  fixed  and  floating  capital  spent  in  producing  it,  is 


CH.  X WHERE  PRODUCTS  ARE  OF  VARIOUS  VALUES  185 


something  less  than  £100 — perhaps  £95  if  the  production 
process  lasts  a year;  perhaps  £97  or  £98  if  it  lasts  only  half 
that  time.  This  difference  of  value  is  the  crease,  as  it  were. 
in  which  Interest  is^au^tT  explahaSonis^a  subject  by 
itself,  with  which  we^^all  have  enough  to  do  in  following 
chapters.  It  would  be  very  far  from  advisable  to  mix  it  up  with 
our  present  inquiry,  where  we  are  dealing  with  the  general 
relation  between  the  value  of  means  of  production  and  that  of 
their  products,  and  for  the  moment  we  shall  therefore  entirely 
disregard  the  existence  of  this  particular  difference  of  value. 

Up  to  this  point  we  have  expounded  the  law  which 
governs  the  value  of  productive  goods  under  the  simple 
hypothesis  that  each  group  of  productive  instruments  permits 
of  only  one  quite  definite  employment.  But  in  actual  life  the 
cases  in  which  this  hypothesis  corresponds  with  facts  are  very 
limited^  It  is,  indeed,  characteristic  of  productive  goods  that 
they^^dmit  of  an  infinitely  more  various  use  than  consumption 
goods:  The"  vasU^majority  of  them  are  adapted  to  several 
productive  uses,  while  many  of  them,  like  iron,  coal,  and, 
above  all,  human  labour,  are  adapted  to  thousands  .of  different 
uses.  In  theoretical  research  we  must,  of  course,  take  note  of 
these  actual  circumstances,  and  see  whether  they  do  not  involve 
some  modification  of  our  law,  that  the  value  of  a group  of  goods 
of  remote  rank  is  determined  by  the  value  of  its  product. 

Suppose,  then,  we  vary  the  assumptions  of  our  tyj 
illustration.  A man  possesses  a great  stock  of  groups  of  pro-" 
ductive  instruments  of  second  rank  (Gg)-  From  one  sue 
group  he  can,  at  will,  make  a finished  commodity  of  the  kind^ 

A,  or  one  of  the  kind  E.  or  one  of  the  kind  C.  Naturally  h^ 
will  provide  for  his  various  wants  harmoniously,  and  w: 
therefore,  by  means  of  different  parts  of  this  stock,  produce 
simultaneously  finished  goods  of  all  three  classes  according  to 
the  measure  of  his  requirements.  In  a scheme  of  provision 
that  was  really  harmonious,  the  amounts  produced  would  be 
so  regulated  that,  in  each  kind,  wants  of  something  like  the 
same  importance  would  depend  on  the  last  sample  of  the  kind, 
and  the  marginal  utility  of  every  sample  would  therefore  be 

approximately  equal. ^ Nevertheless  there  will  be  differences, 

' This  is  demapded  by  the  prinniplp,  of  “ftfionoinin  r.onHiint.”  See  Wieser, 
Ursprung  und  Hauptgesetze  des  vyirthschaftlichen  Werthes,  p.  148. 


186 


THE  VALUE  OF  PRODUCTIVE  GOODS  book  in 


and  even  considftTa.h1p.  diffp.rpinp.pis.  of  marginal  utility,  because, 
as  we  already  know.^Jdie  gradation  of  thft  p.n-nnrfttp.  wants  ip 
any  kind  of  want  is  not  always  uniform  and  unbroken.  One 
fireplace  in  a room,  for  instance,  wlU  give  me  a very  consider- 
able utility — which  I may  represent  by  the  figure  200 — while 
a second  fireplace  would  not  be  of  any  further  use  to  me. 
Naturally,  in  providing  for  my  wants,  I shall  therefore,  in  any 
case,  stop  at  fireplaces  when  I have  one  fireplace  with  its 
marginal  utility  of  200,  even  if  in  other  branches  of  wants 
the  provision  goes  down,  on  the  average,  as  low  as  a marginal 
utility  of  100  or  120.  To  make  our  typical  illustration  true 
to  nature,  therefore,  we  must  assume  that  the  marginal  utility 
of  one  sample  is  of  different  amount  in  the  three  kinds  A,  B,  and 
C — say  100  in  A,  120  in  B,  200  inC.  The  question  now 
is.  In  these  circumstanp.pa  what  is  tb^  value  of  ? 

After  the  practice  we  have  had  in  drawing  distinctions  of 
a similar  kind,  we  can  give  the  answer  without  hesitation — the 
value  will  he  equal  to  100.  For  if  one  of  the  available  groups 
were  lost  the  owner  would  naturally  shift  the  loss  to  the  least 

J sensitive  part : he  would  neither  limit  the  production  of  the 
kind  B,  where  he  would  lose  a marginal  utility  of  120,  nor  of 
the  kind  C.  where  he  would  lose  a marginal  utility  of  200. 
He  would  simply  produce  one  less  of  the  kind  A,  whereby  his 
loss  of  weUbeing  would  be  only  100.  To  put  it  generally: 
The  value  of  thp  pmrlnprivp.  n nit-adjusts- its  elf  tO  the  marginal 
utility  and  value  of  that  nroduct  which  possesses^  the  least 


arginal  utihlv  amnncr  all  the  products  wl^e~pnjtd.uetioq 
^e  economically,  have  been  e-mpin^.d  jA.ll  the 


^relations  which  we  found  to  hold  as  regards  the  value  of 
means  of  production  and  of  theii'  products  under  the  simple 
hypothesis  of  the  single  employment,  hold,  therefore,  generally 
between  the  value  of  means  of  production  and  their  ha^t 
mhwhle,  prodncl,. 

And  how  does  it  stand  with  the  value  of  the  remaining 
classes  of  products.  B and  0 ? This  question  brings  us  to  the 
^urce  of  the  “ law  of  costs.” 

If,  under  aU  circumstances,  the  marginal  utility  attainable 
within  the  kind  itself  were  to  decide,  the  kinds  of  goods  B and 
C would  possess  a value  diverging,  as  well  from  the  value  of 


1 See  above,  p.  145. 


CHAP.  X 


SOURCE  OF  THE  LAW  OF  COSTS 


187 


tlie  kind  A,  as  from  the  value  of  its  costs  Go.  B would  have 
a value  of  120,  C a value  of  200.  But  this  is  one  of  those 


of  goods'  is  'Shifted  to  another  kind,  and  consequently  the 
marginal  ntilTT^y~7)F~the  latter— beemaes  the^j^staadardTfoir'the 
former.^  “That  is~to  say,  if  one  of  the  kind  C gets  lost  there 
is  no  occasion  to  give  up  the  marginal  utility  of  200,  which  it 
would  have  directly  afforded ; we  can  and  will  immediately 
procure  a new  C out  of  a productive  unit  Gg,  and  we  shall 
prefer  to  produce  one  less  of  that  kind  of  good  in  which  the 
marginal  utility,  and  with  it  the  loss  of  utility,  is  least.  This, 
m our  illustration,  is  the  kind  A.  In  virtue  of  the  opportimity 
of  substitution  offered  by  production  a good  of  the  kind  C is 
therefore  valued,  not  at  its  own  marginal  utHitv  200.  but  at 
100,  the  marginal  utility  of  the  least  valuable  cognate  product. 

A The  same  holds,  of  course,  of  the  value  of  kind  B,  and 

would  hold,  generally  speaking,  of  every  kind  of  good  which  is 
“ cognate  in  production  ” ^ with  A,  and  has  at  the  same  time 
an  immediate  marginal  utility  greater  than  that  of  ^e  kind  A. 

This  leads  to  several  important  consequences.  ^First  of  all.^ 
in  this  way  the  value  of  goods  which  have  a higher  individual 

Tna.Tgina.1  nt.ibty  is  put  on  a level  with  the  value  of  the  j 
“ marginal  product  ” — as  we  shall  call  that  product  which  has 
the  least  marginal  utility — and  thus  with  the  value  of  thp  | 
means  of  production,  from  which  both  in  common  come ; the 
theoretical  r»£..Vgl2TP  anrl  rinats.  therefore,  holds  in 

casa-^alsQ.  But  it  is  well  worthy  of  notice  that  here  the 
agreement  between  y^ie  and  costs  is  brought  about  in  a way 
essentially  different  from  the  agreement  between  costs  and 
marginal  product.  In  the  latter  case  the  identity  was  brought 
about  by  the  value  of  means  of  productionadapting"  itself 
to  the  valuffoT the  product;  the  value  of  the  product  was  the 
determining,  that  of  the  means  of  production  the  determined. 
In  the  present  case,  on  the  nontrary^  it,  k the  value  of  the 
product  that  must  adapt  itself  In  the  last  resort,  of  course, 
it  adapts  itself  only  to  the  value  of  another  product,  the 
marginal  product  of  the  cognate  production ; but,  in  the  first 
instance,  it  accommodates  itself  also  to  the  value  of  the  means 
of  production  from  which  it  comes,  and  which  are  mediated 


^ See  above,  p.  156. 


® "Wieser,  p.  146. 


188 


THE  VALUE  OF  PRODUCTIVE  GOODS  book  in 


by  the  substitutionary  connection  with  the  marginal  product. 
Here  the  condu'^ti'^"  of  flpsp.rihps;  as  it,  were^  a broken. 

Jine,  First  it  goes  from  the  marginal  product  to  the  means 
of  production  and  fixes  their  value  ; then  it  goes  in  the  opposite 
direction,  from  the  means  of  production  to  the  other  products 
which  may  be  made  from  them.  In  the  end,  therefore,  products 
of  higher  immediate  marginal  utility  get  their  value  from  the 

side  of  thair  mpans  of  production.  To  translate  this  from  the 
abstract  formula  into  practice.  If  we  are  considering  what  a 
I good  B or  C (generally  speaking,  a product  of  higher  immediate 
I marginal  utility)  is  worth  for  us,  we  must  say  first  of  all : It 
/ is  worth  exactly  as  much  as  the  means  of  production  from 
\ which  we  could  replace  it  at  any  moment.  Then  if  we  examine 
I further  how  much  the  means  of  production  themselves  are 
I worth,  we  come  to  the  marginal  utility  of  the  marginal  product 
A.  But  very  often,  indeed,  we  may  save  ourselves  this  further 
inquiry,  as  we  already  know  the  value  of  the  goods  that  make 
up  the  cost  without  having  to  begin  at  the  foundation  and 
follow  it  from  case  to  case ; and  in  all  such  cases  we  measure 
the  value  of  the  products  in  an  abbreviated  form,  both  accurate 
and  convenient — that  is  to  say,  simply  by  their  costs. 

Here,  then,  we  have  the  whole  truth  about  the  celebrated 
Lawrf  Co^  As^aTTact  people are  right  when  they  say  that 
costs  regulate  value.  Only  they  must  always  be  conscious  of 
the  limits  within  which  this  “ law  ” holds,  and  the  source  from 

(which  it  gets  its  strength.  It  is,  first,  only  a particular  law.  It 
holds  only  in  so  far  as  it  is  possible  to  obtain,  at  will  and  af; 

tlTe  right  time,  substitutes  through  production.  If  there  is  no 

opportunity  of  substitution  the  value  of  every  product  has  .to 
be  measured  by  the  immediate  marginal  utility  of  its  own 
kind,  and  its  agreement  with  the  value  of  the  marginal  pro- 
duct, and  with  the  intermediate  means  of  production,  is  dis- 
turbed. Hence  the  well-known  empirical  proposition  that  the 
law  of  costs  holds  only  as  regards  goods  “ reproducible  at  will,” 
or  “ freely  produced,”  and  that  it  is  simply  aiT  approximate 
law  wEic!r~does  not  bind  the  value  of  the  goods  that  come 
under  it  with  slavish~~exactitu de  to  the  level  of  costs,  but — 
according  as  production  for  the  moment  comes  short  of  demand 
or  runs  beyond  it — permits  of  fluctuations  now  on  one  side, 
now  on  the  other. 


CHAP.  X 


THE  LA  W OF  COSTS  SECONDARY 


189 


But  it  is  still  more  important  to  emphasise,  in  the  second 
place,  that,  even  where— tbe-4a^  of  costs  hnlHs.  costs  are  not 
the  final  hut  only  the  intermediate  cause  of  A'alue.  In  the 


last  resort  they  do  not  give  in  ilmiv  products,  but  receive  h, 


from  them.  In  the  case  of  productive  goods  whicli  have  only 
a single  employment  this  is  perfectly  clear.  That  Tokay  is 
not  valuable  because  there  are  Tokay  ^^neyards,  but  that  the 
Tokay  vineyards  are  valuable  because  Tokay  has  a liigh  value, 
no  one  will  be  inclined  to  deny,  any  more'  than  that  the  value 
of  a quicksilver  mine  depends  on  the  value  of  quicksilver,  the 
wheat  field  on  the  value  of  wheat,  the  brick  kdn  on  that  of 
bricks,  and  not  the  other  way  about.  It  is  only  this  many- 
sided  character  of  most  cost  goods — their  capacity  of  being 
employed  in  many  different  uses — that  gives  the  appearance 
of  the  contrary,  and  a little  consideration  shows  this  to  be  an 
appearance  and  nothings  more.  As  thejiOQn.-tefle.cts-tlie  suu'^ 
ravs  on  to  the  earth,  so  the  many-sided  costs  reflect  the  value. 

which  they  receive  from  their  marginal  product,  on  to  their 

other  products.  The  principle  of  value  is  never  in  them,  but 
outside  them,  in  the  marginal  utility  of  the  products.  The 
law  of  costs  is  not  an  independent  law  of  value ; it  only  forms 
an  incidental  case  inside  the  true  universal  law  of  marginal 
utility.  It  is  simply  the  great  counterpart  to  the  law  of  Com- 
plementary Goods.  As  the  latter  disentangles  and  explains 
those  relations  of  value  which  result  from  the  temporary  and 
causal  collocation — the  simultaneous  co-operation  of  several  goods 
to  a common  useful  end ; so  does  the  Law  of  Costs  for  the 
value  relations  of  those  goods  which  act  in  temporary  and 
causal  scqiicncc — the  w'orking  of  goods  after  one  another  and  " 
through  one  another  to  the  same  final  goal.  If  we  think  of  'i 


o • o 

the  value  relations  of  goods  that  work  into  one  another  as  a J 


much -tangled  net,  we  might  say  that  the  former  law  < 
entangles  the  meshes  in  their  length  and  breadth,  while 
latter  disentangles  them  in  their  depth ; but  both  fall  un 
the  all-embracing  law  of  Ma,rmna1  Utility,  and  are  nothing 


special  applications  of  that  law  to  special  problems. 


BOOK  IV 


PEICE 


CHAPTEE  I 


THE  FUNDAMENTAL  LAW 

Exchanges  are  not  made  simply  for  amusement.  People  who 
take  the — not  always  trifling — trouble  to  exchange  the  goods 
which  they  possess  for  other  goods,  do  so  for  a rational  and 
material  end,  and,  in  nine  hundred  and  nuiety-nine  cases  out 
of  a thousand,  this  end  is  to  better  their  economical  condition 
by  the  exchange.^  Whether  this  end  be  attained,  and  in  what 
degree  it  be  attained,  de^iends  naturally  on  the  current  condi- 
tions of  exchange,  particularly  on  the  prices  which  the  parties 
get  as  equivalent  for  their  goods.  It  is,  therefore,  a perfectly 
natural  thing  that  the  motive  which  gives  rise  to  exchange  in 
general,  namely,  the  striving  after  economical  advantage,  should 
maintain  a commanding  influence  in  the  fixing  of  the  exchange 
prices. 

In  what  follows  I mean  to  inquire  how  prices  are  deter- ' 
mined  under  the  assumption  that  all  who  take  part  in  the 
exchange  act  ej-clusively  from  the  motive  of  pursuing  iheir  T 
immediate  economical  advantage  in  it.  The  law  which  we  \ 
shall  arrive  at  in  this  way  I have  already,^  for  very  good 
reasons,  called  the  fundamental  law  of  the  formation  of  price. 

I am  perfectly  aware  that,  in  practical  life,  this  law  does  not 
exactly  obtain.  For,  although  the  motive  of  self-advantage  is 
almost  never  absent,  and  is  almost  always  the  most  prominent 
motive,  still,  in  price  transactions,  other  motives  do  very  often 
get  mixed  up ; such  motives  as  humanity,  custom,  friendship, 

^ Menger,  Grundsdlze,  p.  153.  Of  course  now  and  tlien  exchanges  may  be  made 
simply  to  show  some  person  a kindness  ; perhaps  to  conceal  a present,  or  a charity 
in  the  guise  of  an  exchange.  But  such  cases  form  only  a quite  insignificant 
minority.  ^ Orundzugc,  part  ii.,  in  Conrad’s  Jahrhucher,  vol.  xiii.  p.  4&t). 

O 


194 


THE  FUNDAMENTAL  LA  W 


BOOK  IV 


vanity,  or  the  influence  of  outside  institutions,  such  as  govern- 
ment taxation,  union  regulations,  boards  for  fixing  wages,  and 
the  like,  give  them  another  direction  than  that  they  would 
have  taken  if  exclusively  dominpited  hv  self-n.d vantage.  Such 
motives,  indeed,  scarcely  ever  get  the  upper  hand  of  the  other 
to  the  extent  of  making  us  conclude  an  exchange  which  would 
cause  us  positive  economic  loss  ; but  they  often  make  us  decide 
to  be  content  with  a less  amount  of  advantage  than  we  should 
have  got  in  steadily  pursuing  our  interests. 

I have  on  the  same  occasion  ^ expressed  myseK  with  all 
clearness  on  the  theoretical  and  practical  importance  of  the 
admixture  of  these  other  influences,  and  I shall  only  now  briefly 
sum  up  what  I then  said.  In  actual  life  this  admixture  of 
motives  causes  certain  modifications  of  the  fundamental  law  of 
the  formation  of  price,  and  the  statement  of  these  modifications 
cannot  be  neglected  in  any  accurate  and  complete  theory  of  it. 
But  if  all  that  is  wanted  is  to  grasp  the  characteristic  features 
of  the  formation  of  price,  it  is  enough  to  put  forward  the 
" fundamental  law  ” above  mentioned.  For  just  as,  among  the 
motives . that  determine  price,  that  of  striving  after  self- 
advantage in  exchange  has  the  lion’s  share,  smdop.ci  the  lion’s 
share  in  the  theoretic  explanation  of  the  pbp.nnTnp.na  of  priee 
fall  to  the  “fundamental  law”  here  stated  And  it  is  suf- 
ficient for  us  in  our  present  task,  as  we  have  not  to  pursue 
the  theory  of  price  as  an  end  in  itself,  but  only  so  far  as  is 
necessary  to  establish  the  theoretical  connection  between  tke 
elementary  phenomena  of  subjective  value  and  the  complicated 
phenomena  of  interest.  In  this  law  we  obtain  a principle 
which  is  not  minutely  accurate,  but  is  amply  sufficient  for  the 
further  development  of  the  theory  of  capital. 

Before  going  on  to  state  the  peculiar  laws  of  price,  it  may 
be  desirable  to  preface  them  by  some  considerations  that  may, 
more  accurately,  unfold  the  content  of  the  fundamental  motive 
which  forms  the  assumption  and  basis  of  the  whole  of  the 
following  inquiry. 

In  exchange  transactions  the  decisions  made  always  turn 
on  two  points : these  are — (1)  whether,  in  a given  state  of 
things  a man  should  exchange  or  not ; and  (2)  if  he  decide  to 
^ Grundziige,  p.  480. 


CH.  I MEANING  OF  EXCHANGE  WITH  ADVANTAGE  195 


ft;cr,ha.ngp,.  what  form  he  should  trv  to  crivp  in  thp.  tf.rms  of  the 

g^xchange.  Now  in  making  these  decisions  it  is  obvious  that 
the  man  who  looks  to  his  own  immediate  advantage  and  nothing 
else,  will  act  according  to  the  following  rules.  First,  he  will 
exchange  only  if  the  exchange  brings  him  an  advantage. 
Second,  he  will  rather  exchange~ibr'a~CTeater~lid^ntage  than 
forj^less.  Third,  be  widl^TatheTexdlangeloif a small  ad^htage 
than  not^xchange_at_a,lI 

It  scarcely  need  be  shown  that  these  three  rules  are  dictated 
by  our  fundamental  motive,  and  constitute  the  practical  sub- 
stance of  it;  what  does  require  elucidation  is  an  expression 
that  recurs  in  them  aU,  “ to  exchange  with  advantage.” 

The  meaning  of  the  expression  obviously  is — to  exchange 
in  «np.h  a way  that  ^bp.  p.YP.h anger  gains  more  in  wellbeing  from 
the  goods,  he  gets  than  he  loses  in  the  goods-he-^es  ; or,  since 
the  importance  that  goods  have  for  life  and  wellbeing  is  ex- 
pressed in  their  subjective  value,  to  exchange  in  such  a way 
that  the  goods  received  pn.ssp..ss  a greater  .suh|pptive  value  than 

the  goods  parted  with.  If  A owns  a horse  and  is  willing  to 
exchange  it  for  fen  casks  of  wine,  it  can  only  be  because  the 
ten  casks  of  wine  have  a greater  value  for  him  than  his  horse 
has.  But,  naturally,  the  other  party  to  the  contract  thinks 
exactly  in  the  same  way.  He,  on  his  part,  will  not  give  up 
the  ten  casks  of  wine  if  he  does  not  get  for  them  a good  that 
has  a greater  value  for  him.  He  will  exchange  his  ten  casks 
for  A’s  horse  only  if  the  wine  is  worth  less  to  him  than  the 
horse  is. 

From  this  we  get  an  important  rule.  An  exchange  is 
economically  possible  only  between  person .s  who  pnt  a different 
value,  even  an  opposite  value,  upon  the  commodity  and  upon 

the  price  equivalents^  The  buyer  must  put  a higher,  the  seller 
a lower,  estimate  on  the  commodity  than  he  does  on  the 
equivalent.  Indeed  the  interest  which  the  two  parties  have 
in  the  exchange,  and  the  gain  they  get  from  it,  increases  as  the 
difference  between  their  estimates  increases;  if  the  difference 

^ It  will  be  observed  that  our  author  does  not  confine  the  word  Price  to  Money 

price,. but  applies  it  to  the  equivalePt  good  or  goods  obtained  in  exchange  for 
what  is,  pre-eminently,  the  good — the  object  of  demand  frqm  buyers,  and  of  supply 
from  sellers.  The  convenient  word  Prdsgut  I render  by  “price  equivalent,”  or 
simply  “equivalent.” — W.  S. 


196 


THE  FUNDAMENTAL  LA  W 


BOOK  IV 


decreases  their  gain  decreases  ; and  if  the  difference  disappears, 
and  their  estimates  coincide,  no  exchange  is,  economically, 
possible  between  them.^ 

It  is  easy  to  see  that,  under  the  regime  of  the  division  of 
labour,  there  must  he  inmimerahlp.  chances  of  opposing  estimates. 

and  therefore  innumerable  opportunities  of  exchange.  That  is 
to  say,  as  each  producer  makes  only  one  or  two  kinds  of  articles, 
and  these  far  in  excess  of  his  own  personal  requirements, 
he  has  at  once  a superfluity  of  his  own  products  and  an  absence 
of  all  others.  He  will,  therefore,  ascribe  to  his  own  product 
a low  subjective  value,  and  to  other  products  a relatively  high 
subjective  value.  But,  conversely,  the  other  producers  will 
ascribe  a high  value  to  all  products  which  they  have  not,  and 
a low  value  to  their  own  products  of  which  they  have  too 
many,  and  here  we  have  in  the  fullest  degree  that  relation  of 
opposite  valuations  which  is  most  favourable  to  the  effecting 
of  exchange. 

Another  idea  that  comes  out  in  what  has  been  ^aid  we 
may  follow  to  its  logical  consequences.  To  one  consulting  his 
own  advantage  an  exchange,  as  we  saw,  is  economically  possible 
only  when  he  estimates  the  good  to  be  acquired  more  highly 
than  tlie  good  possessed.  How,  obviously,  this  will  more  readily 
occur  the  less  value  he  puts  on  his  own  commodity,  and  tlie 
more  vahm  hft  puts  nu  the  equivalent.  A man  who  values  his 
horse,  subjectively,  at  £50,  and  values  a cask  of  wine  at  £10, 
has,  economically,  a much  greater  possibility  of  exchange — or,  as 
we  shall  say  in  future  for  brevity’s  sake,  is  much  more  “ capable 
of  exchange” — than  another  who  values  his  horse  at  £100  and 
a cask  of  wine  at  £5.  The  former,  obviously;  can  proceed  with 
the  exchange  if  six  casks  are  oflered  him  for  his  horse,  while 
the  latter  must  hold  back  unless  something  over  twenty  casks  is 
offered  him.  If  a third  party  again  values  his  horse  at  £40 
only,  and  a cask  of  wine  at  £15,  obviously  he  would  be 
economically  capable  of  concluding  an  exchange  if  even  thi’ee 

^ Say,  e.g.,  that  A values  his  horse  at  five  casks  of  wine,  while  B values  it  at 
fifteen,  then,  if  the  horse  goes  for  ten  casks,  each  gains  an  amount  of  value  repre- 
sented by  five  casks  of  wine.  If  A values  the  horse  at  eight  and  B values  it  at 
twelve,  each  gains  only  a value  of  two  casks.  Finally,  if  both  agree  in  valuing 
the  horse  at  twelve  casks  of  wine,  B,  of  course,  would  be  glad  to  get  the  horse  for 
ten  casks,  or  for  any  price  under  twelve  casks,  but  A,  naturally,  would  not  give  it 
him  at  that  price.  See  Meuger,  Grundsdtze  der  Volkswirthschaftslehre,  p.  155. 


CHAP.  I 


THE  MOST  CAPABLE  EXCHANGER 


casks  were  offered  him  Generally  speaking,  then,  that  ex- 
changer is  the  most  capable  ” wh^ pu^'The-  least  Taltte  on  his 
own  commodity  in  companson  with  that  offered  him  hr  exchange, 
or,  what  is  the  same  thing,  puts  the  highest  value  on  the  other 
commodity  In.  comparison  with  the  commo^y  wliich  he  offers 
in  exchange  for  it. 

Now  that  we  are  sufficiently  acquainted  with  the  meaning 
and  content  of  our  “ fundamental  motive,”  we  may  proceed  with 
our  proper  work,  and  consider  what  are  the  normal  effects 
which  this  fundamental  motive  exerts  on  the  formation  of 

price.  In  this  part  of  our  work  the  method  already  piprsued 
by  several  distinguished  economists  seems  to  me  by  far  the 
most  convenient : first,  by  typical  illustrations  to  show  how.  \ 
under  certain  definite  assumptions,  jrice,  is  and  must  hp.  I 
determined,  and  then  to  separate  the  accidental  surroundings  | 
of  the  illustration  from  what  is  universal  and  typical,  and  I 
formulate  the  latter  into  laws.  I shall  begin  with  the  simplest 
typical  case,  the  determination  of  price  in  isolated  exchange 
between  a single  pair  of  exchangers. 


CHAPIEE  II 


ISOLATED  EXCHANGE 

A PEASANT,  whom  we  shall  call  A.  requires  a horsg.  His 
individual  circumstances  are  such  that  he  attaches  the  same 
value  to  the  possession  of  the  horse  as  he  does  to  the  possession 
of  £30.  A neighbour,  whom  we  shall  call  B,  has  a horse  for 
sale.  If  B’s  circumstances  also  are  such  that  he  considers  the 
possession  of  the  horse  worth  as  much  as,  or  worth  more  than 
£30,  there  can,  as  we  saw,  be  no  exchange  between  them. 
Suppose,  however,  that  B values  his  horse  at  considerably  less, 

say  at  £10.  What  will  happen  ? 

First,  it  is  certain  that  there  will  he  an  exchange ; in  the 
assumed  circumstances  each  of  the  contracting  parties  can 
make  a considerable  profit  by  the  exchange.  If,  for  instance, 
the  horse  changes  hands  at  £20,  A,  who  considers  it  worth  £30, 
makes  a profit  of  £10,  and  B,  who  gets  £20  for  an  article 
worth  only  £10  to  him,  gets  the  same  amount  of  profit. 
They  will,  therefore,  in  any  case,  according  to  the  proposition 
“ rather  a small  gain  than  no  exchange,”  agree  on  making 
an  exchange  at  a price  advantageous  to  both  of  them.  The 
question  now  is : How  high  will  this  price  goJ  As  to  this  it 
may  be  said  definitely  : The  price  must  at  aU  events  be  les^ 
than  £30.  otherwise  A would  have  no  economical  advantage, 
and  would  have  no  motive  for  going  on  with  the  exchange. 
And  it  must  at  all  events  be  highp.r  than  £10.  or  there  would 
be  no  use  in  the  exchange  to  B,  and  perhaps  even  loss.  But 
the  particular  point  between  £10  and  £30  at  which  the  price 
will  be  fixed  cannot  be  determined  beforehand  with  certainty. 
Any  price  between  the  two  is,  economically,  possible ; a price 
of  £10  : Is.  or  a price  of  £29  : 19s  Here,  then,  is  room  for 


CHAP.  11 


ITS  UPPER  AND  LOWER  LIMIT 


199 


: higgling^’ 


According  as  in  the  conduct  of  the 


any  amount  of 

transaction  the  buyer  or  the  seller  shows  the  greater  dexterity, 
cunning,  obstinacy,  power  of  persuasion,  or  such-like,  will  the 
price  be  forced  either  to  its  lower  or  to  its  upper  limit.  If 
both  parties  have  equal  skill  in  bargaining,  the  price  will  be 
fixed  approximately  midway:  that  is  to  sav.  about  £20. 

• There  is  no  difficulty  in  putting  this  briefly  in  the  form  of  j 
a general  proposition.  In  isolated  exchange — exchange  between  / 
one  buyer  and  one  seller — the  price  is  determined  somewhere  ^ 
between  the  subjective  valuation  of  the  commodity  by  the  J 
buyer  as  npper  limit,  gnV»jQp.t,ivp  vabiation  by  the  seller  ' 

as  lower  limit. 


CHAPTER  III 


ONE-SIDED  COMPETITION 

First  : of  one-sided  competition  of  Buyers.  Accommodating 
the  conations  of  our  illustrationto  the  requirements  of  the  new 
typical  case,  let  us  assume  that  A^  finds  a competitor,  whom 
we  shall  call  A2,  already  in  the  field,  and  that  he  also  has  the 
intention  of  purchasing  the  horse.  The  circumstances  of  this 
competitor  are  such  that  he  counts  the  possession  of  the  horse 
worth  as  much  as  £20.  What  will  happen  now  ? Each  of 
the  competitors  wisRes  to  buy  the  horse,  but  only  one,  of 
course^  can  buy  him.  Each  of  them  wishes  to  be  that  one. 
Each,  therefore,  will  try  to  persuade  B to  sell  the  horse  to  him, 
and  the  means  of  persuasion  will  be  to  bid  a higher  price. 
Thus  ensues  the  familiar  phenomenon  of  mutual  overbidding. 
How  long  will  this  last  ? It  will  last  till  the  rising  bids  have 
reached  the-^^^^alnation  of  the  least ^g^aRIe^mpetitor.  wlioT^ 
this  case,  is  A2.  So  long  as  the  bids  are  imder  £20,  A2,  act- 
ing on  the  inbtto  “ father  a small  gain  than  no  exchange,”  will 
try  to  secure  the  purchase  by  raising  his  offer,  which  attempt, 
naturally,  A^,  acting  on  the  same  principle,  will  counteract  by 
raising  his  ofiier.  But  A2  cannot  go  beyond  the  limit  of  £20 
without  losing  by  the  exchange.  At  this  point  his  advantage 
dictates  “ better  no  exchange  than  a loss,”  and  he  leaves  the 
field  to  his  competitor. 

This  is  not  to  say  that  the  price  A,  pays  must  be  just  £20^ 

It  is  possible  that  B,  knowing  A^  to  be  in  urgent  want  of  a 
horse,  will  not  be  content  with  £20,  and  wiU  try,  by  holding 
back  and  by  skilful  bargaining,  to  extort  a price  of  £25,  £28, 
or  even  £29  : 19s.  The  one  thing  certain  is  that  the  price 
cannot  exceed  £30  (the  valuation  of  Aj  who  concludes  the 


CHAP.  Ill  ONE  SELLER  AND  SEVERAL  BUYERS 


201 


purchase)  and  cannot  be  under  £20  (the  valuation  of  Ag,  the 
excluded  competitor). 

Assume  now  that,  in  addition  to  A^  and  A^,  three  other 
^uversT^^.  A,.  A.,  compete  for  the  horse,  and  that  their  cir- 
cumstances are  such  that  they  count  the  possession  of  the 
horse  equivalent  to  £22,  £25,  and  £28  respectively.  It  is 
easy  to  show,  in  the  same  way,  that,  in  the  ensuing  com- 
petition, A3  will  bid  to  the  limit  of  £22,  A4  to  £25,  and  A5  to 
£28  ; that  the  most  capable  competitor,  Aj,  will  always  be  the 
successful  one;  and  that  the  price  will  be  fixed  between  £30 
as  higher  limit,  and  £28 — the  valuation  of  the  most  capable  of 
the  excluded  competitors — as  lower  limit. 

The  results  of  this  investigation  may  therefore  be  expressed 
in  the  following  general  proposition : — 

In  one-sided  competition  of  buyers — where  there  is  one 
seller  and  more  than  one  buyer — -the  most  capable  competitor 
will  be  (bp  pnrcbagpj ; that  is,  the  one  who  puts  the  highest 
value  on  the  commodity  he  wishes  to  buy  in  comparison  with 
the  good  he  wishes  to  sell ; and  the  price  will  lie  somewhere 
between  the  valuation  of  the  purchaser  as  higher  limit,  and 
the  valuation  of  the  most  capable  among  the  unsuccessful  com- 
petitors as  lower  limit — always  understood  that  the  price  can 
in  no  case  be  lower  than  the  subsidiary  lower  limit  of  the 
seller’s  own  valuation.  Comparing  this  proposition  with  the 
result  arrived  at  under  the  former  typical  case,  we  see  that 
competition  of  buyers  has  the  effect  of  narrowing  the  sphere 

within  which  price  is  determined,  and  narrowing  it  in  the 
upward  direction.  Between  A and  B the  limits  within  which 
price  was  determined  were  £10  and  £30  ; by  the  added  com- 
petition the  lower  limit  was  moved  up  to  £28. 

Second : of  one-sided  competition  of  Sellers.  This  forms 
the  exact  converse  of  the  foregoing.  Entirely  analogous  ten- 
dencies lead  to  entirely  analogous  results — only  in  an  opposite 
direction.  The  statement  of  this  need  not  detain  us  long. 

Suppose  that  our  friend  A is  the  only  buyer,  and  that  five 
jdealers,  whom  we  shall  call  B,,  B„  B,,  B^,  and  Br,  are  compet- 
ing to  sell  him  a horse.  We  assume  that  all  the  horses  are 
equally  good,  but  Bj  values  his  horse  at  £10,  B2  values  his  at 
£12,  Bj  at  £15,  B4  at  £20,  and  B5  at  £25.  Each  of  the  five 


202 


ONE-SIDED  COMPETITION 


BOOK  IV 


rivals  tries  to  utilise  the  present  as  the  sole  opportunity  of  sale, 
and  endeavours  to  secure  a preference  over  his  competitors  by 
underselling,  as  in  the  former  case  by  overbidding.  But  as 
no  one  will  care  to  offer  his  commodity  for  Ip.s.s  than  what,  it, 
is  worth  to  himself,  will  cease  offering  at  £25.  B,  at  £20, 
B3  at  £15  ; then  B^  and  Bj  will  compete  for  a while  till, 
hnally,  at  £12  Bg  finds  himself  “economically  excluded,”^  and 
Bi  alone  keeps  the  field.  The  price  at  which  he  remains  a 
seller  must  necessarily  be  higher  than  £10 — otherwise  there 
would  be  no  use  in  the  exchange,  and  therefore  no  motive  for 
it — but  neither  must  it  be  higher  than  £12,  otherwise  Bg  will 
continue  his  competition. 

In  general  terms,  then,  we  have  the  following  proposition. 
In  one-sided  compp.tition  of  sellers — where  there  is  one  buyer 
and  more  than  one  seller — the  most  capable  competitor  will  be 
the  actual  seller ; that  is,  the  one  who  puts  the  lowest  value 
on  the  good  he  wishes  to  sell  in  comparison  with  the  com- 
modity he  wishes  to  buy ; and  the  price  wdl  lie  somewhere 
between  the  valuation  of  the  seller  as  lower  limit,  and  the  valu- 
ation of  the  most  capable  among  the  unsuccessful  competitors 
as  higher  limit.^  Compared,  therefore,  with  the  case  of  isolated 
exchange,  where,  according  to  the  first  formula,  the  price  had 
to  lie  between  £10  and  £30,  the  sphere  within  which  price  is 
determined  will  be  narrowed  by  the  competitions  of  sellers, 
and  narrowed  in  the  downward  direction. 

^ Menger,  p,  183. 

Always  without  prejudice  to  the  second  or  subsidiary  upper  limit  formed  by 
the  valuation  of  the  buyer,  which  the  price  can  in  no  case  go  beyond.  Where 
there  is  anything  like  full  competition  of  sellers,  however,  this  is  seldom  of 
practical  importance. 


CHAPTER  IV 


TWO-SIDED  COMPETITION 

The  p.aRp.  of  twn- sided  competition  is  the  most  common  in 

p/^.nnormV,  it  is  t,hp,  mosl.  important  in  the  development 

of  thp.  Law  of  Price.  It  demands,  therefore,  our  most  careful 
attention. 

The  t}^ical  situation  which  the  present  case  assumes  may  he 
represented  by  the  following  scheme.  It  shows  us  ten  buyers 
and  eight  sellers,  each  of  them  wishing  to  buy  or  seU  a horse, 
and  it  tells  us  at  the  same  time  the  degree  of  the  subjective 
valuation  put  upon  the  horse  by  each  of  the  exchangers.  It 
will  be  seen  that  the  figures  which  represent  these  valuations  are 
very  different,  and  this  exactly  corresponds  with  facts.  Indeed, 
the  individual  relations  of  want  and  provision  for  want,  which 
regulate  subjective  value,  are  so  very  various  that  it  would  be 
difficult  to  find  two  persons  who  had  an  entirely  similar 
opinion  about  the  value  of  any  one  thing. 

BtrvEKS.  Sellers. 


A, 

values  a horse  at 

£30 

El 

values  a horse  at 

£10 

(and  win  buy  at  any  price  under) 

(and  will  sell  at  any  price  over) 

-^2 

35 

£28 

E2 

33 

„ £11 

As 

33  33 

£26 

E3 

33 

„ £15 

^4 

33  33 

£24 

E4 

33 

^17 

As 

£22. 

Es 

3J  ^ 

„ £20  ^ 

Ae 

* 53 

£2r.ji 

33 

„ £21;l0s.;i3 

Ar 

33  33 

£20'/ 

^ E, 

33 

„ £25 

As 

53  33 

£18 

Eg 

33 

„ £26 

A9 

33  33 

£17. 

Aio 

33  33 

£15 

To  complete  the  scheme,  it  must  be  added  that  all  the. 

competitors  appear  simultaneously  in  the  one  market : that  all 


204 


TWO-SIDED  COMPETITION 


BOOK  IV 


the  horses  offered  for  sale  are  of  equal  quality  ; and,  finally,  that 
the  buyers  and  sellers  make  no  mistake  about  the  actual  state 
of  the  market,  such  as  would  prevent  them  from  really  pur- 
suing their  own  egoistic  interests.^  We  ask  now.  What  will 
happen  in  this  situation  ? 

The  circumstances  of  Aj  are  such  that  he  considers  a 
horse  to  be  worth  £3  0 to  him ; it  would  therefore  be  to  his 
advantage  to  buy  even  at  £29  ; and  it  is  quite  certain  that  any 
of  the  eight  sellers  would  be  glad  to  sell  him  a horse  at  a 
price  so  advantageous  to  them.  But,  evidently,  Aj  would  be 
a very  poor  business  man  if  he  rashly  bought  at  such  a high 
price.  For  his  self-interest  demands  from  the  exchange  not 
merely  a profit,  but  the  ^eatest  possible  profit.  Instead, 
then,  of  buying  at  the  highest  price — which,  all  the  same,  he 
might  do  in  the  worst  possible  case — he  will  prefer  to  begin 
by  offering  a price  as  low  as  his  least  capable  rivals,  and  will 
only  raise  his  offer  when,  and  in  the  degree  that,  it  is  neces- 
sary to  save  himself  from  being  shut  out  of  the  market. 

In  the  same  way  Bj,  who,  economically,  could  quite  well 
sell  at  a price  of  £11,  and  at  that  price  could  very  easily  find 
buyers,  will  carefully  hold  back  from  offering  his  horse  at  the 
lowest  figure  which  he  would  accept,  and  will  not  reduce  his 
price  below  what  he  must  take  if  he  is  to  keep  his  place  in  the 
c om petition,  jit  mav  he  assumed,  then,  that  the  transaction 
will  begin  with  the  buyers  holding  back  and  _ .offering  _lp^y 
prices,  and  with  the  sellers  holding  back  and  asking  high, 
priceai. 

^ If,  e.g.,  a buyer  erroneously  imagines  the  number  of  horses  brought  to 
market  to  be  much  less  than  it  really  is,  U mav  very  well  happen  that  he  hastily 
consents  to  pay  a higher  price  than  he  would  have  found  .necessary  if  he  had 
given  better  attention  to  his  own  interests.  The  influence  of  errors  like  this  on 
the  formation  of  price  must  not,  of  course,  be  overlooked  in  a theory  of  price,  but 
where  we  are  merely  trying  to  bring  out  the  simplest  fundamental  law  it  is  not 
necessary  to  go  into  such  details.  See  Grundzuge,  as  before,  part  ii.  p.  486. 

2 The  more  experienced  both  parties  arCj  and  the  more  familiar  with  the  con- 
dition of  the  market-the  shorter  will  be  the  time  spent  in  “ trying  the  maakfit” 
by  preliminary  offers.  In  an  old  and  well-organised  market  competitors  will 
save  themselves  the  trouble  of  making  offers  that  are  not  meant  to  be  taken, 
and  will  make  their  first  offers  at  least  somewhere  near  that  zone  within  which 
the  market  price  will  finally  be  fixed.  The  extreme  limit  of  this  curtailment  is. 
given  in  th^'ijfixed  prices  ” of  sellers.  In  this  case,  trying  the  market  is  entirely 
dispensed  with,  and  sellers  undertake  at  one  throw,  as  it  were,  to  hit  the  very 
zone  into  which  the  condition  of  the  market  will  force  the  price.  They  must  try 


CHAP.  IV  SEVERAL  BUYERS  AND  SEVERAL  SELLERS  205 


Suppose  the  buver.s  bpgin  with  an  nFfer  of  £1 It  is  at 
once  clear  that — putting  aside  the  case  of  gross  error  as  to 
the  condition  of  the  market — the  buying  cannot  be  concluded 
at  this  price.  For  at  £13  all  the  ten  buyers  would  be  willing 
to  buy,  since  all  of  them  put  a greater  value  on  the  horse  than 
£13;  Irut,  at  that  price,  only  two  horses,  those  of  and  E,j. 
could  reconomically)  he  offered  for  sale^  Now  evidently  Bj  and. 

B.,  would  be  very  poor  sellers  if  they  did  not  make  use  of  the 
active  competition  of  buyers  to  raise  their  price,  and  the  others 
would  be  as  poor  buyers  if  they  let  the  best  chances  of  pur- 
chasing be  snatched  away  by  two  of  their  members  without 
attempting  to  obtain  the  preference  by  bidding  a price  some- 
what higher,  but  still  advantageous  to  themselves.  Exactly, 
then,  as  in  the  case  discussed  in  last  chapter,  the  surplus  buyers, 
will  be  w^eeded  out  by  means  of  mutual  overbidding.  How 
long  will  this  weeding  process  go  on  ? 

At  any  price  under  XI 5 all  ten  buyers  can  compete. 

From  that  point  the  least  capable  competitors  must,  one  after  _ 

another,  withdraw,  from the  cmnpetvtioiL  At  £15  Aj,,  is 

knocked  out,  at  £17  Ap,  at  £18  Ag,  at  £20  A-.  But  as  the 
bids  rise  on  the  one  side,  the  number  of  those  sellers  who,  eco- 
nomically, become  capable  of  selling  increases  on  the  other  side. 

At  any  price  above  £15  Bj  may  seriously  think  about  selling, 
above  £17  B4,  and  above  £20  B5  Thus  the  marked  dispro- 
portion, which  existed  at  first  between  the  horses  demanded 
and  the  horses  actually  offered  for  sale,  is  graduallj^  reduced. 

At  £13  there  was  an  effective  demand  for  ten  horses,  and  only 
two  could,  economically  be  offered ; while,  at  any  price  over 
£20,  only  six  horses  are  demanded  and  five  offered,  the  majority  t 
of  buyers  over  sellers  being  thus  reduced  to  one.  So  long, 
however,  as  the  rival  buyers  are  in  the  majority,  and  this  fact 
is  accurately  known  in  the  market,  there  can  be  no  final  settle- 
ment. For,  on  the  one  hand,  the  sellers  have  always  the 
chance,  and  the  temptation,  to  take  advantage  of  the  excess  of 
buyers  and  stand  out  for  higher  prices  ; and,  on  the  other  hand, 

to  hit  this  zone  quite  exactly  ; for  if  they  put  the  price  lower  they  lose  their 
profit,  while  if  they  put  it  higher  the  buyers  in  the  market  get  supplied  by 
other  competitors,  and  the  sellers  are  left  with  their  commodities.  Fixed  prices, 
however,  are  less  common,  in  the  open  market  than  in  shops,  where  selling  is 
never  conducted  under  the  full  pressure  of  competition,  and  where,  consequently, 
any  mistake  in  the  price  asked  is  not  so  hazardous. 


206 


TWO-SIDED  COMPETITION 


BOOK  IV 


the  miitiially  opposed  interests  of  the  rival  hiiyp.ra  noTnpftl  them 

to  Jaid  still  higher  against  each  ptbfx.  Obviously,  Ag  would 
scarcely  consult  his  own  interests  if  he  were  calmly  to  look  on 
while  his  five  rivals  went  off  with  the  five  cheapest  horses,  and 
left  him  no  chance  of  an  exchange,  and,  therefore,  no  chance  of 
a profit.^  But,  at  the  same  time,  no  oue  of  these  rivals  would 
allow  Ag  to  purchase  one  of  the  five  horses  most  “ strongly  ” 
offered  for  sale.  For,  if  so,  the  man  who  withdrew  in  favour 
of  Ag  might  indeed  purchase  a horse,  but  only  under  less 
favourable  conditions — the  conditions,  that  is,  offered  by  the 
most  conservative  sellers  Bg,  By,  and  Bg,  and  at  a price  which, 
at  least,  exceeds  the  subjective  valuation  of  £2 1 : 1 Os.  that 
Bg  puts  on  his  horse.  Thus  if  the  buyers  know  their  own 
interests,  the  whole  body  of  them  wiU  feel  impelled  to  continue 
their  bidding  against  each  above  the  level  of  £20. 

Finally,  the  situation  becomes  essentially  different  when 
the  rising  bids  have  reached  the  limit  of  £21.  At  that  price 
Aa  is  compelled  to  cease  bidding,  and  there  are  now  only, 
five  sellers  against  five  buyers.  These  buyers  can  all  be  satis- 
fied simultaneously,  and  there  is  no  occasion  for  further  com- 
petition among  themselves : on  the  contrary,  as  against  the 
sellers,  their  common  interest  is  to  close  at  the  lowest  possible 
price.  The  bidding  of  buyers  against  each  other,  which 
hitherto  has  prevented  the  final  settlement,  now  comes  to  an 
end,  and  the  bargains  may  be  concluded  a.t  the  price  of  £21^ 
But,  they  need  not  be  concludeff-aLAhat  price.  The  sellers 
may  possibly  be  stiff  and  refuse  £21,  in  hope  of  a still  higher 
offer.  What  will  happen  in  this  case  ? First  of  all,  the 
buyers,  rather  than  have  a fruitless  errand  and  go  away  without 
making  any  exchange,  will  bid  higher.  But  their  limit  is  now 
very  near  at  hand.  If  the  sellers  stand  out  for  a price  above 
£22,  A.;  must  give  up  all  idea  of  purchase,  and  there  wiU  be 
five  sellers  against  four  buyers.^  One  of  the  sellers,  then,  will 
have  to  fall  out,  and  as  no  one  would  care  to  be  that  seller 
there  will — from  motives  quite  analogous  to  those  which  before 
prompted  the  surplus  buyers  to  overbid  each  other — ensue  a, 

^ If  the  horses  of  Bj  to  Bj  are  sold,  the  most  capable  seller  remaining  is  Bg, 
■who  values  his  horse  at  £21  : 10s. — that  is,  higher  than  Ag.  As  we  know,  then, 
an  exchange  between  Ag  and  Bg  is  economically  impossible,  and  the  same  is  true 
« fortiori  of  the.  less  capable  sellers  By  and  Bg. 


CHAP.  IV  RELylTION  FAVOURABLE  TO  SETTLEMENT  207 


mutual  iiTH^ ftp. spiling  a-mong  the  si^rplns  sp.np.r.s,  till  sucb  time 

as  the  fifth  seller  meets  a huveiL:  this  will  be  the  case  some- 
where under  the  limit  of  £22.^ 

Indeed,  in  the  present  case,  the  limit  must  go  still  lower. 
So  long  as  a price  over  £21  : 10s.  was  possible,  there  would  be 
a sixth  possible  seller  in  the  person  of  Bg ; this  would  give  the 
sellers  a majority  of  one  over  tlie  five  buyers,  and  compel  them 
to  offer  under  each  other,  if  they  are  not  to  be  shut  out  from 
the  exchange.  In  this  competition  the  weakest  must  first  go  to 
the  wall,  and  this  fate  will  overtake  Bg  the  moment  that  his 
rivals  are  content  to  take  a price  below  the  level  of  £21  : 10s. 
— at  which  figure  the  number  of  competitors  on  either  side 
will  be  equalised,  and  the  level  of  price  found  at  which  the 
competition  may  cease.  Thus  assuming,  as  we  do  in  this 
illustration,  that  each  competitor  knows  what  is  the  condition 
of  the  market,  and  intelligently  foUows  his  own  interests,  the 
limits  within  which  the  price  must  necessarily  be  det^ermiuer! 
are  narrowed  to  £2 1 and  £21:1  Os. ; those  being  the  only 
limits  within  which  there  occurs  the  relation  favourable  to  the 
final  settlement — that  all  who  are  able  to  take  a share  in  the 
business  find  it  their  advantage  to  do  so^  while  all  who  do  not 
find  it  their  advantage,  the  unsuccessful  competitors,  have  no 
power  to  prevent  the  others  from  coming  to  terms.^ 

Let  us  try  now  to  apply  the  results  of  these  lengthy 
analyses  to  our  theory  of  price. 

We  notice,  first,  that  what  decides  success 
^mppiitinn  is,  as  in  the  case  of  one-sided  competition, 
the  degree  of  " capability  ” for  exchange,  Dn  either  side 


^ It  need  scarcely  be  said  that  the  gradual  bidding  Up  of  buyers,  and  the. 
gradual  under-offering  of  sellers,  do  not  usually  take  place  in  two  separate  and 
succeeding  stages,  but  generally  occur  simuItaneniiHly. 

^ In  the  nature  of  things  the  result  shown  in  our  abstract  scheme  will  be  the 
more  exactly  realised  in  practice,  the  better  known  the  total  condition  of  the 
market  is  to  all  interested  ; that  is  to  sav.  the  more  organic  the  market,  and  tbe_ 
more  publicly  the  negotiations  are  conducted.  Where,  on  the  other  hand,  as  is 
usually  the  case,  transactions  are  conducted  in  groups  that  are,  indeed,  in  com- 
munication, but  are  yet  somewhat  separated  from  each  other  either  in  space  or 
time,  the  relations  of  competition  that  would  prevail  over  an  entire  market  will, 
naturally,  not  be  quite  active  in  the  single  groups,  and  this  ha.s  for  re.siilt  that  the 
prices  formed  in  the  single  groups  are  frequently  only  more  or  less  appro.ximate 
to  the  ideal  market  price  represented  in  our  scheme,  without  necessarily  exactly 
coinciding  with  it. 


208 


TWO-SIDED  COMPETITION 


BOOK  IV 


it  is  the  most  capable  competitors  wlio  ooirifi  to  t.p.rms^ 
namely,  those  biiyers  who  put  the  highest  value  on  the 
commodity  (A^  to  Aj),  and  those  sellers  who  put  the  lowest 
value  (Bj  to  Bg),  while  all  less  capable  competitors  are  ex- 
cluded. And,  indeed,  if  we  look  more  closely,  we  shall  find 
that  tlie  series  of  snccessful  competitors  includes  all  competing 

paii-s.  arranged  by  capability,  between  whom  there  exists  the 
rplflti'nn  iipppsigary  for  exchange,  viz,  tbnt.  the  IniypT  considers 
Ihe  0OT'P^^'>^'b'ly  •vyortk  more  than  the  seller  does.  In  our 
illustration  Ag  considers  Bg’s  horse  worth  more  than  Bg 
himself  does,  and,  accordingly,  they  can  exchange  with  each, 
other.^  Ag,  on  the  other  hand,  values  the  horse  of  By  at 
£21  only,  while  Bg  values  it  at  £21  : 10s.,  and  therefore  they 
cannot  come  to  terms — and  still  less  can  those  competitors  who 
are  less  capable. 

Very  closely  related  to  the  grounds  on  which  are  decided 
the  successful  competitors  in  the  struggle  of  competition  are, 
secondly,  the  grounds  on  which  is  decided  the  market  pric^ 
that  results  from  this  struggle.  This  price — to  recur  to  our 
illustration — cannot,  in  any  case,  be  higher  than  the  valuation 
of  Ag,  nor  less  than  that  of  Bg ; otherwise  the  fifth  buyer  in 
the  one  case  and  the  fifth  seller  in  the  other  would  not  have 
come  to  terms.  But,  again,  the  price  cannot  in  any  case  be 
higher  than  the  valuation  of  Bg,  nor  less  than  that  of  Ag ; 
otherwise  in  the  former  case  a sixth  buyer  would  begin  com- 
peting with  the  other  five  buyers,  and  in  the  latter  case  a 
sixth  seller  competing  with  the  other  five  sellers ; the  equi- 
librium would  thus  be  destroyed,  and  the  overbidding  and 
under-offering  would  inevitably  be  continued  till  such  time  as 
the  price  was  forced  within  the  limits  already  indicated. 

To  put  these  results  in  general  form; — In  two-sided  com- 
petition the  market  price  is  determined  within  a latitude  of 
which  ttip  npppv  limit,  i.s  p.Qnstituted  bv  the  valuation  of  the  Iqpt 
buyer  who  actually  exchanges  (the  last  buyer)  and  that  of  th,p, 
moHf,  fLa.pahI^  seller  excluded^/the  first  excluded  seller),  and  the 
laffifiX-limit  by  the  valuation  of  the  least  capable  seller  who  actu- 
ally effects  a sale  (the  last  seller)  and  that  of  the  most  capable 
buyer  excluded  (the  first  excluded  buyer).  The  meaning  of  this 

1 Or  with  one  of  the  more  capable  c'ompetitors,  but  in  no  c^ase  with  a weaker 
one.  See  more  e.xactly  on  this  point  in  my  GrundziXge,  p.  499. 


CHAP.  IV  ANALOGIES  WITH  SUBJECTIVE  VALUE 


209 


double  limitation  is  that,  jn  every  onse.  it  is  the  .narrowop  b'niiJ: 
i.hat  deeidesd  If,  finally,  we  substitute  the  short  and  signi- 
ficant name  of  “ Marginal  Pairs  ” for  the  detailed  description  of 
the  four  parties  whose  competition  determines  the  price,  we  get 
this  very  simple  formula  : yhgjnarbct  price  is  limifprl  a-url  rlatpr- 
mimai  by  t.bc  subjective  vnlnnt.imis  of  t.bft  two  M n rgTrnTl~-P!riTs, 

This  suggests  a number  of  refiectioli^  ' 

Tlic  tirsi,  thing  tbnt,  .strikes  ns  is  the,  analogy  between  thg 
formation  of~price~~aTrdHihe--fermntd(yrr^^  -^lue.  We 

saw  that  the  subject!^  value  of  miy~^od,  unaffi:cted  by  the 
more  important  uses  to  which  single  members  of  the  same 
stock  might  be  put,  was  a “ marginal  value^’^^^^^^aTvahie  deter- 
mined  by  the  good’s  marginal  utilitY.  or  that  utility  which 
stands  on  the  very  limit  of  the  economically^efmissible. 
we  see  tlnrt-^wgcy  i-rrarkt^  price  is  a “ marginTrh  price,” — a price 
determined  by  the  economical  relations  of  those  competing 
pairs_:ivhicli,  also,  stand  on~the  very  limrC~Df  exchan^ability. 
Ii  is  easy  to  see  that  the  analogy  here  is  no  chance  coincidence, 
but  one  that  results  from  closely-related  and  internal  causes. 
In  the  case  of  subjective  valuation,  the  motive  of  economical 
advantage  demanded  that  the  available  stock  of  goods  should 
be  employed  in  satisfying  the  wants  that  stood  highest  on 
each  man’s  scale,  the  last  of  the  wants  thus  supplied  indicating 
the  “ marginal  utility.”  In  the  case  of  the  formation  of  price, 
the  motive  of  the  competitors’  economical  advantage  demands 
that  the  pairs  which  are  most  capable  on  the  scale  of  competi- 
tors should  come  to  terms,  and  one  of  these  again  is  the  last, 
the  “ marginal  pair.”  In  the  former  case,  the  provision  for  all 
satisfactions  more  important  than  the  marginal  utility  was 
assured  without  the  particular  good  whose  value  was  the 
subject  of  discussion,  and  the  only  utility  dependent  on  this 
latter  good  was  the  last,  the  marginal  utihty.  In  the  latter 
case,  all  the  contracting  pairs  more  capable  than  the  inavgriTar 
pairs  may  come  to  terms  at  prices  higher  or  lower,  and  here 
again  it  is  only  the  fate  of  the  last,  the  marginal  _paiiv-that 

^ In  our  illustration  it  is  the  valuation  of  the  excluded  parties  A3  and  63.  If, 
however,  the  valuatio.n  of  Ab,  instead  of  being  £21,  had  been  £19,  and  that  of 
Bg,  instead  of  £21 :10s.,  had  been  £23,  the  limits  would  have  been  determined 
by  the  Valuation  of  the  last  pair  who  actually  Kime  to  terms : the  price  would 
have  been  fixed  between  £20  and  £22. 


210 


TWO-SIDED  COMPETITION 


BOOK  IV 


[ 


depends  on  the_prirp,  just  reaching  a definite  hei£ht,  neither 
greater  nor  less.  Ahd,_jdaally,  _ as  in  the  former  case  the 
importance  of  the  last  dependent  wantT^n  virtue  "of  its 
dependent  relation,  gave  the  good  its  value,  so,  in  the  latter 
case,  the  economical  circumstances  of  the  last  dependent  pair — 
here  also  in  virtue  of  their  dependent  relation — confer  on  the 
commodity  its  price. 

But  this  analogy  does  not  exhaust  the  connections  between 
price  and  subjective  value.  Of  still  greater  consequence  is  the 
fact  that  price,  from  beginning  to  end,  is  the  product  of  sub- 
jective valuations.  Look  back  over  what  we  have  said.  It  is 
the  relation  of  the  subjectfaa  valuation  of  commodity  and  price- 
equivalent  which  decides  ItiB  persons  who  may  consider  ifawofth 
their,  while  to  compete.,  either  as  bujfaFs  or  sellerTjthat  is  to 
say,  clecidesAvhichparties  are  “ capable  of  exchange.’^^t  is  the 
same  relation  which  decides  on  the  degree  of  each  com  peti ton’s 
capability,  of  exchange.  With  perfect  exactness  it  decides  for 
each  man  the  figure  at  ^vhich  his  advantage  calls  him  to  join 
in  the  competition,  and  it  decides,  at~the  same  time,  the  limit 
at  which  he  is  beatSTra^d— ehhged-to-wvrthdluw  'frbin:^  As 
further  result,  it  decides  the  parties-who.  among  the  most  capable 
competitors,  actu.a.11y  come  to  terms,;  it  decides  to  which  pair 
falls  the  role  of  being  marginal  pair  ;^^d,  finally,  it  decides  on. 
tbe,  price  at  which  the  bargains  are  concluded,  in  the  market. 
Thus,  as  a fact,  in  the  whole  course  of  the  formation  of  price 
— so  far  as  it  is  conducted  on  purely  egoistic  principles — ^^there 
is  not  a single  phase  nor  feature  which  is  not  traceable,  wholly 
and  entirely,  to  the  position  of  subjective  valuations  as  its 
cause.  And  this  is  at  bottom  perfectly  natural.  For,  as  we 
know,  t^ftse  .subjaative — va,lua,tions  point  out  whether  any 

^ importance,  great  nr  little,  attaches  to  a good  as  regards  our 
economic  wellbeing,  and  how  great  the  importance  is ; and, 
consequently,  these  valuations,  wherever  we  acquire  or  part 
with  goods  solely  with  regard  to  our  economic  wellbeing,- mark 
out  the  natural,  indeed  the  only  poSsil^le  compass  of  our  trans- 
actions. We  are,  therefore,  fully  justified  in  defining  price  as 
the  resulta,nt  of  subjective  valuations  put  upon  commodity 

k and  price-equivalent  withiii_a^market.^  s > 


^ Sax,  who,  in  his  theory  of  value  and  price,  stands  wholly  and  entirely  on 
the  fousadation  laid  by  Menger,  repeatedly  atid  with  emphasis  characterises  market 


j 


CHAP.  IV  RESULTANT  OF  SUBJECTIVE  VALUATIONS  211 


Of  course  it  is  a resultant  of  a peculiar  kind.  The  amount  • 

of  price  is  not  the  resultant  of  the  sum,  or  of  the  nypraffe  of-aJ-l  ^ 
the  valuations  that  come  to  the  surface : io  the  forTmtioTi  UiJ 
price  these  take  very  different  share&>>ipT^>ne~  class  of  them  has 
no  effect  on  price  at  all  : viz.  thoskValup^^^^Ti«  mprio  iw  q11 
the  unsuccessful  competitors  except 


■ valuations  made  by  all^ 

, SueJcoT 

the  most_capaMe__paii> 


It  is  aU  the  same  whether  there  are  no  such  valuations,  or  aa/c 
whether  there  are  scores  of  them  in  the  market ; they  make 
not  the  slightest  difference  on  the  resultant  price.  In  our 
illustration,  whether  there  are  unsuccessful  buyers  A7  to  A^q 
or  not,  whether  the  category  of  the  unsuccessful  is  composed 
of  them  alone,  or  of  a hundred  others  besides, — so  long  as 
they  cannot  bid  more  than  £20,  it  is  easy  to  show  that  the 
resultant  price  will  always  run  between  £21  and  £21  : 10s. 

The  excluded  competitors  may  increase  the  congestion  of  the 

inarket,  but  they  are  not  factors  in  that  condition  iiLthe_.  market 
which  determines  the  formation  of  price.^ 

A second  gi'oup  plays  a very  peculiar  part  in  this  resultant, 

VIZ.  that  consisting  of  the  valuations  of  all  the  contracting 
parties  who  actually  come  to  terms,  excln.qivp.  of  the  la.9t. 
What  th^  do  is  simply  to  bind  and  neutralise  each  other. 
Eecur  again  to  our  typical  illustration.  If  we  inquire  what, 
for  instance,  the  presence  of  Aj  contributes  to  the  formation  of 
price,  we  find . that  he  takes  up  one  member  of  the  opposing 
series,  namely,  Bj,  with  the  result  that  now  the  formation  of 
price  proceeds  exactly  as  if  neither  Aj  nor  Bj  were  in  the 
market.  Similarly  it  is  not  difficult  to  see  that  the  efficiency  ol; 

A, ,  Aq,  and  A,  simply  consists  in  cancelling  the  efficiency  of  . 

B. ,,  Bgj  and  Bj_:  if  they  are  in  tlie  competition  the  resultant 

I 

price  as  an  “average  of  individual  valnes”  (Theoretische  Ch-tnullegung  der  Staats- 
wirthschajt,  p.  276  and  passim).  This  expression,  if  given  without  commentary, 
is  exceedingly  unfortunate,  indeed  directly  misleading.  As  may  be  seen  from 
what  follows  above  (and  more  exactly  from  what  I wrote  in  my  Grimdziige, 
pp.  505  and,  particulars^  522),  the  characteristic  thing,  on  the  contrary,  as 
regards  the  resultant  price,  is  that  it  is  an  “average”  ip  the,  nsnal  .seii.se  of 
the  word. 

^ At  least  under  the  assumi)tjon  distinctly  made  in  our  inquiry,  that  the  com- 
petitors who  appear  in  the  market  have  a correct  knowledge  of  the  condition  of 
the  market.  If  we  depart  from  this  assumption,  the  appearance  of  more  than  a 
hundred  demanders  might  give  rise  to  the  erroneous  opinion  that  there  may  be 
among  them  a great  many  persons  of  higher  “capability,”  and  this  might  mislead 
Xhe  few  capable  comhetitors  who  are  present  into  rashly  making  higher  offers. 


I 


212 


TWO-SIDED  COMPETITION 


BOOK  IV 


price  falls  between  £21  and  £21  : 10s.;  if  they  were  all  absent 
A-  and  Bj  would  still  make  their  exchange  at  a price  between 
£21  and  £21  : 10s.  And  it  is  worth  empha,aising  that  the 
cltgrcc  of  the  subjective  vnliintions  made  in  this  group  is  quite 
indifferent  to  the  result  Aj,  for  instance,  whose  valuation,  in 
our  scheme,  is  put  down  at  £30,  would  cancel  Bj  not  less 
thoroughly  if  his  valuation  amounted  to  only  £25  or  £22  ; and, 
conversely,  suppose  that  his  estimate  were  £200  or  £2000,  of 
this  enormous  amount  absolutely  nothing  would  affect  the  result- 
ant price  except  the  sum,  in  any  case,  absorbed  in  neutralising  Bj. 

If,  however,  the  valuations  of  this  group  have  no  direct 
influence  on  the  formation  of  price,  it  cannot  be  said  that  they 
are  quite  without  effect  When  the  valuations  of  Aj  to  A4 
cancel  those  of  B^  to  B^  they  have  a twofold  result.  First, 
they  prevent  any  stronger  seller  than  B^  getting  into  the 
marginal  pair  which  immediately  determines  the  price.  And 
second,  they  prevent  the  strongest  sellers  from  cancelling  the 
next  strongest  buyers— as  they  might  do  if  not  cancelled 
ali'eady — and  they  thus  prevent  any  weaker  member  of  the 
buying  series  than  Ar,  from  getting  into  the  marginal  pair.^ 
The  part  played  by  all  those  exchanging  pairs  who  are  stronger 
or  more  capable  than  the  last  may  therefore  be  accurately 
characterised  in  the  following  words ; Their  valuations  coiu- 
tribute-nothing  directly  to  the  formation  of  the  resultant  price. 

but  they  do  indirectly,  in  so  far  as  they  neutralise  each  othe£. 
and  thus  reserve  tlie  role  of  marginal  pair  for  another  couple. 

Finally,  the  real  decision  of  price  lies  exc]usLvelv__wiJ±L^ 

* To  show  this,  suppose  we  leave  Ai  to  A4  out  of  our  illustration.  The  position 
of  the  parties,  then,  is  as  follows  : — 


Ag  . 

A7  • 

A.  . 


A.J  . 


. £22 
. £21 
. £20 


B., 

B:, 


£18 


. £17 
. £1.5 


B5 

Be 

B7 

Bs 


£10 

£11 

£15 


£17, 


. £2a 

. £21 :10s. 
. £25 
. £26 


Here  we  see  that  the  last  pair  within  which  the  economical  conditions  of 
exchange  are  pre.sent  consists  of  As  and  B4.  The  buyers,  therefore,  are  now 
represented  in  the  decisive  marginal  pair  by _a„we,aker  member,  the  sellers  by  a 
stidnger  one.  -Accordingly  the  limit  of  price,  which  in  the  last  case  stood  between 
£21  and  £21  : 10s.,  moves  down  to  between  £17  and  £18. 


CHAP.  IV  EFFECT  OF  THE  VARIOUS  VALUATIONS 


213 


roup,  ana  tnat  a smalL-Oiie— the,  valuiLtions  of  the  two^ 
Tuarp^inal  paivs.  All  weaker  competitors  being,  absolutely,  with- 
out influence,  and  all  stronger  ones  cancelling  each  other,  they 
and  they  alone  are  the  directly  effective  components,  and  the 
market  price  is  their  resultant. 

At  first  sight  it  may  appear  strange  that  so  fevy  persons, 
and  those  so  little  conspicuous,  should  decide  the  fate  of  the 
whole  market,  but  on  closer  examination  this  will  be  found 
quite  natural  If  aU  are  to  exchange  at  one  market  price,  thp 
price  must  be  such  as  to  suit  ah  excha.Tifflrig  partip.s  ; and  since, 
naturally,  the  price  which  suits  the  least  capable  contracting 
party  suits,  in  a higher  degree,  all  the  more  capable,  it  follows, 
quite  naturally,  that  the  relations  of  the  last  pair  whom  the 
price  must  suit,  or,  as  the  case  may  be,  the  first  pair  whom  it 
cannot  suit,  afford  the  standard  for  the  height  of  price.3 


^ Students  of  economic  literature  will  not  fail  to  notice  an  interesting  relation 
in  wliich.  the  above  theory  stands  to  certain  doctrines  that  have  for  long  obtained 
full  recognition.  When  Thiinen — and  with  him  the  whole  body  of  economic 
doctrine — said  that  the  rate  of  interest  was  determined  by  the  productivity 
of  the  “portion  of  capital  last  applied.”  and  the  rate  of  wage  by  the_ rejtupa 
of  the  “last  worker  employed  in  the  undertaking”  ; or  when,  much  earlier,  the 
question  as  to  which,  among  several  costs,  regulates  market  price  was  decided  in 
favour  of  the  “highest  costs  of  production  that  were  still  necessary  to  provide  for 
the  market,”  i.e.  in  favour  of  the  “last  seller,” — we  recognise  in  all  these,  with- 
out difficulty,  adaptations  to  special  cases  of  the  same  principle  on  which  we  have 
built  the  doctrine  of  marginal  utility  and  the  theory  of  the  formation  of  price. 
The  only  thing  is  that  at  that  time  economists  were  not  ^et  conscious  jot  thj6 
universal  importance  of  these  peculiar  lines  of  thought.  They  meant  simply  to 
state  a couple  of  special  rules  of  limited  range,  while  in  reality  they  had  hit  upon 
the  dominating  Leitmotiv,  which  underlies  the  entire  mechanism  of  industry 
carried  on  under  the  guidance  of  self  interest,  and  which,  therefore,  runs  through 
the  entire  formation  of  value  and  price. 


CHAPTEK  y 


THE  LAW  OF  SUPPLY  AND  DEMAND 


The  zone  within  the  limits  of  which  the  struggle  of  competi- 
tion forces  the  formation  of  price  is,  as  we  have  seen,  character- 
ised as  lying  between  the  subjective  valuations  of  the  marginal 
pairs,  and  on  this  characteristic  feature  we  have  formulated 
our  law  of  price.  But  this  zone  has  a second  characteristic 
feature : it  is  that  in  which  exactly  as  many  commodities  are 
■off^rl  fhr  salft  as  are  wanted  to  "^urjpiase^^ Dr,  to  use  the 
common  expressions,  in  which  supply  and  demand  are  quan- 
titatively in  equilibrium.  In  our  scheme,  at  a price  which  did 
not  rise  to  £21  more  horses  were  demanded  than  were  offered ; 
at  a price  which  rose  above  £21  : 10s.  more  horses  were  offered 
than  were  demanded ; while  in  the  zone  indicated  by  our  law 
of  marginal  pairs — that  between  £21  and  £21  : 10s. — the 
position  requisite  to  end  the  competition  was  reached,  and  at 
price  exactly  as  many  horses  were  asked  as  were  offered 


How,  if  it  should  be  thought  preferable,  the  formulation  of 
the  law  of  price  may  be  based  on  this  second  characteristic 
feature,  and  it  will  then  take  the  following  shape : The  market 
pri^is  found  in  that  zone  in  which  supply  and  demand 
quanti^iti’^y  bSance  each  other.  This  formula  is  as  correct 
as  the  other.  It  indicated  the  same  zone  in  another  way. 
But  it  is  less  expressive  (1)  in  so  far  as  it  only  points  to 
the  level  of  the  determining  zone  in  ^a  roundabout  way. 


^ I need  scarcely  say  in  so  many  words  that  it  is  not  the  number  of  persons 
wishing  to  buy  and  sell  on  which  the  formation  of  price  depends,  but  the  mass  of 
commodities  desired  and  offered,  and  that  in  the  typical  scheme  it  is  only  for 
simplicity’s  sake  that  I have  assumed  each  person  to  desire  and  offer  for  sale 
only  one  commodity,  whereby  number  of  persons  and  mass  of  commodities  go 
•pari  passu. 


CHAP.  V ANOTHER  FORMULATION  OF  OUR  LAW 


215 


while,  by  our  formula,  the  limits  of  this  zone  are  directly  and 
positively  indicated  ; (2)  as  it  has  to  contend  to  soine  extent 
with  .the  difRculty  of  hn.ving  to  use  tlm.expressiona_Supp1y  and 
Pemand, — for  the  ptotean  ambiguity  of  these  terms  is  sure  to 
bring  innumerable  errors  and  misconceptions  in  their  train,  just 
as  it  has  brought  the  terms  themselves  into  thoroughly  bad 
repute  with  many.^  Still,  these  drawbacks  may  very  well  be 
overcome  by  critical  attention ; and  there  is  no  nbjp.etinn  in 
my  opinion,  to  treat  the  theory  nf  prir.e  under  the  good  old 
catchwords  Supply  and  Demand,  if  care  is  only  taken  to  avoid 
the  errors  and  misunderstandings  which  so  plentifully  surround 
them,  and  to  inform  the  old  forms  and  formulas  with  new  and 
clear  knowledge.^ 

In  one  special  case  this  sep.nnd  formulation  of  our  law  of 

price  is  even  the  more  exaet  of  the-twer-  In  the  vast  majority 
of  cases,  the  zone 'within  which  supply  and  demand  ju^balance 
each  other  exactly  -Coinnide..s  --witlL...the  zone  whose  limits  are 
marked  out  by  the  valuations  of  the  mai^naT  pairs.  But  there 
is  one  quite  definite  coincidence  of  circumstances  in  which  it  may 
happen  that  the  equilibrium  between  supply  and  demand  does 
not  make  its  appearance  within  the  whole  of  the  last-mentioned 
zone,  but  only  within  a distinctly  narrower  part  of  that  zone ; 
and,  in  such  cases,  the  price  is  always  fixed  within  these  narrower 
limits.  The  very  peculiar  coincidence  of  circumstances  which 
produces  this  result  occurs  very  rarely  indeed  in  economic  life, 
but,  among  the  cases  where  it  does  occur,  there  is  one  that  is 
very  important  for  the  theoretical  explanation  of  interest,  and 
for  that  reason,  in  spite  of  its  somewhat  “ exotic  ” character,  I 
must  devote  a few  words  to  it. 

The  casuistical  conditions  of  this  case  are  the  following. 
First,  there  must  be  considerable  latitude  between  the  valua- 
tions  of  the  marginal  paira  This^wndition  is  most  thoroughly 
fulfilled  where  all  the  competing  exchangers  come  to  terms 
(there  being,  therefore,  no  excluded  competitors),  and  when,  at 
the  same  time,  the  buyers,  as  a body,  value  the  commodity 

^ See  my  Orundziigc,  p.  525. 

■ On  the  relation  of  the  above  theory  of  price  to  the  old  doctrine  of  Supply 

and  Demand,  as  well  as  on  the  truth  and  error  contained  in  that  doctrine,  I hare 

already  written  at  length  in  my  Q-rundzuge,  pp.  524-534  ; here  it  is  sufficient  to 
refer  to  that  work. 


216 


THE  LA  W OF  SUPPLY  AND  DEMAND 


BOOK  IV 


considerably  higher  than  the  selleis  do.  If  there  are,  for 
instance,  ten  buyers  who  each  value  the  commodity  at  £10, 
and  ten  sellers  wlio  each  value  it,  subjectively,  at  £1,  obviously 
all  the  ten  pairs  can  come  to  terms,  and  the  zone  which  lies 
between  the  valuations  of  the  last  buyer  and  the  last  seller 
represents  the  wide  latitude  between  £1  and  £10.  Secondly, 
that  this  latitude  should  be  narrowed  down,  the  further  circum- 
stance must  be  present,  that  the  desire  of  the  buyers  is  directed 
to  an  unlimited  number  of  goods,  •while,  at  the  same  time,  the 
total  amount  of  means  of  nurchase  must  be  strictl-y  limited, 
and  the  buyers  must  be  determined  to  spend  the  whole  of  this 
sum  in  purchase  of  the  commodities  in  question — in  the  pur- 
chase of  fewer  goods  if  the  price  be  high,  in  the  purchase  of  a 
proportionately  larger  number  of  goods  if  the  price  be  low.  To 
put  it  in  terms  of  our  illustration.  Say  that  each  of  the  ten 
buyers  is  resolved  to  spend  the  sum  of  £100  in  buying  cotton 
goods;  that  is  to  say,  at  any  price  under  £10  he  will  buy  as 
many  pieces  as  he  can  obtain  for  £100.  And  suppose  that 
against  this  total  competing  demand  of  £1000  there  is  a supply 
of  200  goods,  which  their  owners  are  inclined  to  let  go  at  any 
price  above  £1.  Tt  is  easy  to  see  that  the  price  must  be  fixed 
at  £5  the  piece.  For  if  the  price  were  to  be  less,  say  £4,  the 
200  pieces  offered  would  be  purchased  for  £800,  and  £200  of 
the  available  means  of  purchase  would  remain  unemployed. 
Here  the  owners,  acting  on  the  motto  “rather  a small  gain  than 
no  exchange,”  will  continue  bidding  up  against  each  other,  and 
so  raise  the  price  to  £5,  at  which  figure  the  whole  capital  of 
£1000  finds  employment  If,  on  the  other  hand,  the  price 
were  to  be  put  still  higher,  say  £8,  only  125  pieces  of  cotton 
goods  could  be  bought  with  the  £1000  available,  and  75  would 
remain  unsold.  Now,  obviously,  no  seller  (considering  that  the 
price  remains  profitable  to  him  till  it  is  brought  down  as  low 
as  £1)  would  willingly  forego  taking  part  in  the  exchange,  and 
thus  the  sellers,  in  fear  of  being  shut  out,  would  offer  below 
each  other,  a.nd  the  price  would  be  pressed  down  to  the  equi- 
librium point  of  £5.  Inside  the  wider  zone,  then,  of  £1  to 
£10 — that  determined  by  the  valuations  of  the  marginal  pairs 
— the  necessity  for  equilibrium  between  supply  and  demand 
determines  the  price  with  much  more  exactitude,  and  fixes  it 
at  £5,  that  being  the  point  at  wln'cli,  if  the  competitors  follow 


CHAP.  V IN  SOME  CASES  A MORE  EXACT  LAW 


217 


their  own  interests  without  let  or  hindrance,  the  market  price 
must  be  fixed. 

As  we  have  already  said,  the  extremely  peculiar  coincidence 
of  circumstances  necessary  to  this  result  occurs  very  seldom, 
but,  as  it  happens,  the  cases  where  it  does  occur  are  very  not,- 
nhle.  One  of  these  is  the  formation  of  the  price  of  Money — 
which,  however,  does  not  concern  us  here.^  A second  is.  the. 
tormatiou  of  price  in  the  T,ahmir  market,  and  this  is  the  case 
which  we  shall  have  to  take  up  later  on,  on  account  of  its  close 
connection  with  the  origin  and  height  of  Interest.  It  should, 
liowever,  be  carefully  noted  that,  even  in  these  two  cases,  the 
conditions  under  which  this  special  form  of  the  law  of  price 
appears  are  seldom  met  with  in  economic  life  in  entire  isola- 
tion. Thus  the  practical  importance  of  such  cases  is  stiU 
further  diminished,  and,  if  the  recognition  of  them  cannot  well 
be  ignored  in  the  course  of  any  theoretical  exposition,  stUl,  as 
regards  the  infinite  majority  of  cases,  the  first  formulation  of 
the  law  of  price — that  which  determines  the  height  of  priee  Ly 
the  subjective  valuations  of  the  marginal  pairs— mav  be  relied 
on  with  perfect  confidence.  T1iis  formnlatinri  is  always  correct. 
and,  for  the  infinite  nmioiity  of  cases,  is  sufficiently  exact. 

Moreover,  without  losing  its  practical  usefulness  in  the  majority 
of  cases,  it  permits  of  being  still  further  simplified.  Before 
going  on  to  this,  however,  some  other  explanations  are 
necessary. 

1 Without  being  a blind  adherent  of  the  “ Quantit)’  theory.”  I believe  that, 
along  with  other  important  circumstances,  the  quantity  of  money,  the  amount  of 
the  supply  of  money,  exerts  a powerful  influence  on  its  purchasing  power.  But 
the  supply  of  money  has. exactly  the  peculiarity  described  in  the  text,  that,  rather 
than  let  money  lie  entirely  unused,  holders  will  be  content  with  a comparatively 
unremunerative  employment,  and  that,  at  the  same  time,  the  entire  given 
quantity  of  money  strives  to  realise  itself  in  the  purchase  of  an  unlimited  quantity 
of  commodities — the  more  the  better. 


CHAPTER  VI 


THE  INDIVIDUAL  DETERMINANTS  OF  PRICE 

In  the  chapter  before  last  we  saw  that  price  is  determined  at 
a level  fixed  by  the  valuations  of  the  marginal  pairs.  We  have 
still  to  ask,  What;  are  the  circumstances  which  determine 
whetherjhis  level  itself  is  high_o^low^  ? 

The  first  few  steps  in  the  answer  are  very  easy.  It  is 
clear  at  a glance  that  the  two  things  which  must  have  the 
decisive  intluence  on  the  position  of  the  marginal  pairs  are  the 
num her  and  the  intm.sitv  of  the  desires  or  val nations  oiiJanth 
sides.  In  this  way.  The  level  of  the  valuation  of  the  marginal 
pairs  will  tend  to  be  high  when,  on  the  side  of  the  buyers, 
there  are  very  high  valuations,  and,  relatively,  a great  many  of 
them,  and  when,  on  tlm  side^  of  the  sellers,  the  low  valuations 
are  relatively  few.  For,  in  this  case,  the  few  low  valuations  of 
the  sellers  will  be  cancelled  by  a portion  of  the  more  numerous 
high  valuations  of  the  buyers,  and  since,  after  this  is  done,  there 
are  still  buyers  with  a high  valuation,  while  at  the  same  time  the 
only  remaining  sellei’s  also  have  a high  valuation,  the  marginal 
pairs  on  both  sides  are  composed  of  persons  with  high  valua- 
tions. On  quite  analogous  grounds  the  level  of  the  valuation  of 
the  marginal  pairs  will  tend  to  be  low  when,  on  the  aide  of  the 
buyers,  there  are  (relativelvl  few  high  valuations,  and  on  the 
-^de  ofthe  sellers  thorp.  a.rp._.(.rp.1fi.tivelvl  many  low  valuations. 

If  we  single  out  the  individual  factors  from  the  combined 
action  of  which,  as  we  have  shown,  the  vaktation  level  of  the 
marginal  pairs  results,  we  get  the  following  individual  deter- 
minants of  price  : ^ — 

^ T .shmilil  Vilcfi  to  .say  that  I Iiere  bringr  fonMi'd  the  theory  of  tlie  determinants 
aLpticS-OJilx-iiLthe  biiefest  af^e.pLtgines^  because  the  details  of  it  have  no  imnie- 


CHAP.  VI 


FACTORS  OF  DEMAND 


219 


1.  The  number  of  desires  directed  towards  the  commodity 

(Extent  of  Demand.^ 

2.  The  figures  which  the  buyers  put  upon  their  valuations 

(Intensity  of  Demand). 

The  latter,  however,  is  not  a simple  matter.  The  figures 
in  which  valuations  are  expressed  are  in  no  wise  simple 
expressions  of  the  absolute  amount  of  subjective  value  which 
the  commodity  has  for  the  valuer.  They  only  express  a 
relation  obtained  by  comparing  two  different  valuations — ^that 
of.thgjcommodity  and  that  of  the  equivalent  price.  When  we 
said  in  our  scheme  that  A, values  a horse  at  £30,  that  is  not 
to  say  or  prove  anything  of  the  absolute  importance  of  a horse 
to  A’s  wellbeing ; all  that  it  expresses  is  the  relation  in  which 
the  value  of  the  horse  to  A stands  to  the  value  of  the  money 
to  A.  It  simply  says  that  A values  the  horse  thirty  times 
more  highly  than  he  values  one  pound  sterling.  If,  therefore,  we 
wish — and  this  is  the  task  in  which  we  are  at  present  engaged 
— to  lay  down  the  elementary  factors  in  the  formation  of  price, 
we  must  put  down,  instead  of  the  combined  amounts  which 
make  up  the  figures  of  our  valuation,  the  elements  out  of  which 
they  are  combined. ' These  elements  are  two-^  first,  the 
absolute  amount  of  subjective  value  which  the  commodity  has 
for  the  valuer ; 'aii3^“second,  the  absolute  amount  of  the  sub- 
jective value  which  the  unit  of  the  equivalent  price  has  for 
the-  valuer.  And,  indeed,  they  obviously  work  towards  com- 
bihatioh  in  this  sense,  that  the  figures  are  high  in  direct  ratio 
to  the  absolute  value  of  the  commodity,  and  in  inverse  ratio  to 
that  of  the  equivalent,  and  vice  versd. 

Thus,  in  our  scheme  of  the  determinants  of  price,  instead 
of  the  valuation  figures,  we  have  to  lay  down  as  the  deter- 
minants of  these  figures — 

[а)  The  subjective  valuation  of  the  commodity  by  the 

buyers  (which  itself,  again,  according  to  the  law  of 
marginal  utility  already  laid  down,  depends  on  the 
relation  of  wants  and  provision  for  want) ; and 

(б)  The  subjective  valuation  of  the  equivalent  fricc  hY  the 

buyers."  Since,  undeFpresehl  conditions,  it  is  money 

diate  interest  for  the  theory  of  capital.  Any  one  interested  in  the  theory  of 
price  as  such,  I would  refer  to  the  full  statement  in  Conrad’s  Jahrhucher,  vol.  xiii. 
pp.  508-524. 


220  INDIVIDUAL  DETERMINANTS  OF  PRICE  book  iv 

that  mostly  serves  as  equivalent,  and  since,  as  we 
saw  in  a former  chapter,  the  unit  of  money  has  a 
smaller  subjective,  value  for  the  rich  than  for  the 
l^oor,  it  is,  in  the  last  instance,  the  standard  of  comfort 
of  the  buyers  which  has  the  preponderating  influence 
on  the  formation  of  this  determinant.^ 

Continuing  our  enumeration  we  'have — 

3.  The  number  in  which  goods  are  offered  for  sale  (Extent 

of  Supply). 

4.  The  figures  which  the  sellers  put  upon  their  valuations 

(Intensity  of  Supply!. 

As  in  the  former  case,  this  latter  determinant  may  be  split 
up  into  two  simpler  factors  — 

(a)  The  subjective  valuations  of  the  commodity  by  the 
sellers. 

(J)  The  subjective  valuations  of  the  equivalent  price  ly 
the  sellers. 

These  two  find  their  own  further  determination  according  to 
the  law  of  marginal  utility.  But  frequently  this  leads  to  a very 
noteworthy  peculiarity.  In  the  present  condition  of  industry 
most  sales  are  made  by  men  who  are  producers  and  merchants 
by  profession,  and  who  hold  an  amount  .of  their  commodities 
entirely  beyond  any  needs  of  their  own.  Consequently,  for 
them  the  subjective  use- value  ^ of  their  own  wa,re.s  is.  for  the 
most  part,  very  nearly  nil ; and  the  figure  which  they  put  on 
their  valuation  (in  which  the  subjective  use -value  is  the 
standard  element)  also  sinks  almost  to  zero.  Finally  comes 
the  result  that,  in  such  sales,  the  limiting  effect  which,  accord- 
ing to  our  theoretical  formula,  would  Vip  PVPrfpH  V>y^tbp,  val na- 
tion of  the  last  seller,  practically  does  not  come  into  play,  and 
price  is  actually  limited  and  determined  by  the  valuations  of 
th^^  buyers  alone.  In  other  words : when  goods  are  once 
'4>roduced,  and  the  owner  can  do  nothing  with  them  for...hia 
own  personal  want.c;,  t.fifiy  must.  all'  the"  same,  seek  a market. 
To  find-4his  market  the  seller  must,  in  the  usual  way,  put  his 

1 The  older  theory  Tvas  misled  by  this  into  substituting,  for  the  determinant 
“ subjective  valuation  of  the  equivalent  price.”  the  “ability  to  pay”  of  the 
buyers,  which  is  not  exactly  false,  but  is  very  one-sided.  See  the  more  exact 
statement  in  Conrad’s  Jahrhiicher,  pp.  520,  527. 

* This,  and  not  subjective  exchange  value,  is  the  important  thing  for  the 
formation  of  price.  See  the  Grundzuge,  p.  516. 


CHAP.  ■-  I 


FACTORS  OF  SUPPLY 


221 


goods  at  a price  low  enough  to  find  hny(H\s  for  the  whole  stock 
he  olfCT^f5r~ sale.  In  the  case  of  a stock  of  1000  pieces,  for 
instance,  he  will  find  his  market  at  a price  which  is  somewhat 
less  than  the  valuation  of  the  thousandth  buyer,  and  somewhat 
higher  than  the  ^'aluation  of  the  thousand  and  first  If,  now, 
the  relations  of  production  and  ^ale  are  normal,  the  whole  stock 
offered  will,  almost  invariably,  be  taken  off  by  the  demand  at  a 
price  which  is  far  above  the  minimum  use-value  nf  tbp.  com- 
moditv  to  the  sellers,  and  which,  beyond  the  full  amount  of 
costs,  brings  them  a business  profit.  If  the  circumstances,  how- 
ever, are  unfavourable,  it  may  well  happen  that  the  seller  must 
seek  for  his  market  at  considerably  lower  levels  of  demand, 
and  be  content  to  take  prices  which  show  a loss  when  compared 
with  costs  of  production.  But,  as^a_rule,_evem  those  forced 
prices  are  still  above  the  subjective  use- value  of  the  commodity 
to  the  seller,  and  the  funcdqn  of  this  icjnbjpctiivp.  ua&r.value,_aa 
lower  limit  of  price,  does  not  come  into  operation.  It  is  only 
if  the  price  should  sink  almost  to  zero  that  it  would  be  checked 
in  its  descent  by  this  latter  limit,  the  valuation  of  the  seller, 
finally  coming  into  play.  But  it  can  scarcely  ever  come  to 
this : in  almost  all  cases  the  competition  of  buyers  is  suffi- 
cient of  itself  to  stop  the  downward  movement  at  a higher 
point  on  the  scale.  Thus,  in  regard  to  the  prices  actually 
established  within  a large  and  organised  market,  the  law  of 
price  undergoes  a great  simplification.  Of  the  four  valuations 
which,  as  “ valuations  of  the  two  marginal  pairs,”  limit  the 
zone  within  which  price  is  determined,  the  valuations  of  the 
seller,  for  the  reasons  mentioned  above,  fall  out  altogether. 

But,  if  the  buyers'  are  very  numerous,  the  interval  between 
the  figures  which  two  successive  buyers  put  on  their  valua- 
tion is  so  small,  that  the  zone  limited  by  the  figure  of  the 
last  buyer  and  that  of  the  first  unsuccessful  competitor,  is 
narrowed  almost  to  a point.  And  so  far  as  this  is  the  case  it 
may  be  asserted,  with  sufficient  exactness,  of  the  economic 
exchange  which  goes  on  in  large  markets,  that  the  market  price 
is  determiripd  bv  the.  V.a1nation  of  the  Last  Buven^ 

1 This  may  be  a suitable  place  to  finish  the  analysis  of  Scharling’s  argument, 
which  I began  on  p.  160.  Scliarling  explains  (Conrad’s  Jahrbiicher,  vol.  xvi. 
p.  542)  that  in  all  essential  respects  he  can  agree  with  my  theory  of  prire  ; only, 
he  says,  it  does  not  go  far  enonghiTMv  “determinants."  and  even  the  deter- 


INDIVIDUAL  DETERMINANTS  OF  PRICE  book  iv 


222 

miiiaiits  of  these  determinants,  do  not  go  to  the  very  root  of  the  explanation  ; 
tliere  is  still  something  wanting ; and  this  something,  this  Schlussstein  or  “ element 
which,  in  the  last  resort,  determines  the  conditions  for  an  exchange,”  Scharling 
thinks  that  he  has  found  in  the  “exertion  ( Anstre.naunn')  which  is  spared  the  ttian 
who  wishes  ...  to  obtain  possession  of  a good  by  the  fact  that  the  good  is 
transferred  to  him,  in  the  case  in  question,  by  the  other  party  in  the  exchange” 
(p.  551).  If  Scharling  here  were  to  mean  by  Anstrcngwig  the  toil  of  production 
which  must  otherwise  be  expended,  directly  or  indirectly,  for  the  acquisition  of  the 
good,  his  proposition  would  be  positively  false  (see  above,  p.  160  in  note),  and 
this,  indeed,  Scharling  himself  seems  to  see  and,  indirectly  at  least,  to  admit 
(pp.  531,  554).  But  he  goes  on  to  give  this  expression  a wider  meaning.  Under 
it  he  now  embraces,  among  other  things,  the  exertion  which  it  costs  to  induce  ag 
owner  to  part  with  his  commodity  (p.  554),  or  “ to  meet  competitors  ” (p.  556),  or 
“to  meet  other  suitors  by  overbidding”  (p.  558),  or  “ to  overcome  the  indisposition 
of  the  owner  to  part  with  the  good  ” (p.  558),  and  so  on.  “The  right  of  the  owner 
to  possess  the  good,”  explains  Scharling  in  the  most  significant  passage  of  this 
kind,  “ is  the  last  hindrance  which  stands  in  the  way  of  the  buyer’s  acquisition  of 
the  same,  and  this  is  now  the  thing  to  remove.  The  exertion  which  is  required  for 
this  determines  the  value,  the  conditions  for  the  exchange  ” (p.  658).  Now,  what 
kind  of  “ exertion  ” is  this  ? ■ Scharling  himself  speaks  of  it  more  than  once  with 
all  desirable  plainness  (e.g.  p.  555,  line  15  ; p.  558,  lines  5,  16,  etc.)  It  consists 
.simply  in  the  offering  of  a sufficiently  high  or  higher  price,  in  a bidding  up  or 
bidding  higher.  And  now  I ask  : First,  is  there  any  justification,  material  or 
linguistic,  for  calling  the  offering  of  a price  an  “ exertion,”  and,  specially,  for 
calling  the  offering  of  a price  of  £20  twice  as  great  an  exertion  as  offering  a price 
of  £10  ? Second;  is- the  “exertion ” which  consists  in  offering  the  purchase  price, 
e.g.  at  an  auction,  snared  the  purchaser,  or  must  he  not  rather  take  the  exertion 
on  himself  if  he  is  to  obtain  the  good  ? And,  third  and  principally,  is  it  explain- 
ing the  formation  of  price,  or  going  round  about  the  explanation  in  a manifest 
circle,  to  account  for  the  height  of  price  by  the  amount  of  the  exertion  which  the 
meeting  of  competition  and  the  inducing  of  the  owner  cost,  and  then  explain 
this  exertion  again  as  the  offering  of  a sufficiently  high  or  higher  price  ? Is  this 
not  rather  to  say  directly  ; — the  price  is  high  when  and  because  much  must  ho 
paid  to  get  the  good,  and  it  is  low  in  another  case  when  and  because  but  little 

need  be  paid.?  Who  will  be  inclined  to  accept  this  as  “ der  Weisheit  letzten 
Schliiss,”  as  the  long -sought -for  coping-stone  of  the  theory  of  price? — And 
now  one  more  remark  in  case  of  misunderstanding.  I am  very  far  from  deny- 
ing that  “difficulty  of  attainment”  or  “amount  of  toil  of  production”  may,  and 
very  often  actually  does,  afford  one  single  important  secondary  determinant  for 
the  relation  of  want  and  provision  for  want,  thereby  for  the  height  of  marginal 
utility,  and  so,  finally,  for  the  amount  of  value.  But  this  determinant  only 
works  in  the  way,  and  within  the  limits,  which  I have  indicated  in  my  theory 
(see  in  particular  the  statement  of  the  “ exceptional  case,”  where  the  amount  of 
a pain  or  strain  averted  determines  the  value  of  a good,  Grundziige,  p.  42,  and 
especially  the  statement  of  the  influence  of  costs  of  production  on  value  and 
price,  p.  61 ; then  pp.  521,  532,  534).  On  the  other  hand,  the  more  extensive 
claim  that  Scharling  puts  forward  with  so  much  emphasis  (vol.  xvi.  pp.  551,  652), 
that  difficulty  of  attainment  by  itself  alone  is  the  last  universal  determinant  and 
measure  of  value.  I can  only  most  emphatically  reject. 


CHAPTEE  Vll 


THE  LAW  OF  COSTS 

In  the  sphere  of  price,  as  in  the  theory  of  subjective  value, 
we  find  a law  firmly  rooted  in  economic  literature  and 
accredited  by  conimon  experience.  It  tells  us  that  the 
market  price  of  goods  reproducible^  at  will  tends.  .±o.  eqjmlise 
itself,  in  the  lojig-T-nn,  v^n'th  Costs  of  rroduction.  Tlie  following 
perfectly  valid  line  of  argument  is  usually  adduced  in  proof  of 
this.  The  market  price  of  goods  reproducible  at  will  cannot, 
in  the  long-run,  be  maintained  either  much  above  or  much 
below  their  cost.  If  at  any  time  the  price  of  an  article  rises 
appreciably  above  the  cost,  its  production  will  be  particularly 
profitable  to  the  undertakers.  This  will  not  only  induce  the 
latter  to  extend  their  already  flourishing  businesses,  but  will 
encourage  new  undertakers  to  enter  the  same  remunerative 
branch  of  industry.  Thus  the  amount  of  product  brought  to 
market  will  be  increased,  and  finally — according  to  the  law  of 
supply  and  demand — a fall  in  price  will  ensue.  If,  conversely, 
at  any  time  the  market  price  falls  below  costs,  continued  pro- 
duction will  show  a loss ; many  undertakers  will  reduce  their 
output ; the  supply  of  the  commodities  will  be  reduced ; and 
this,  finally,  in  virtue  of  the  law  of  supply  and  demand,  naust 
lead  to  a raising  of  the  market  prica 

Eound  this  law  of  costs  has  gathered  a great  mass  of  theo- 
retical detail,^  which  may,  for  our  purposes,  be  left  entirely  on 

^ Thus  the  question  as  to  costs  of  production  or  costs  of  reproduction  ; whether, 
in  the  case  of  a variety  of  costs,  it  is  the  hie;hest,  the  lowest,  or  an  average  cost 
that  is  to  he  taken_M  standard  ; what  elements  are  to  be  reckoned  among  costs, 
and  so  on. 


224 


THE  LA  W OF  COSTS 


BOOK  IV 


one  side.  Our  whole  interest  is-eeatrBfLdn  the  question  as  to 
the  position  whinh  the  law^.sn  wp.11  Rop.rp.dited  by  experience, 
takes  in  the  s-v^tematic  theory . of  price.  Does  it  run  counter 
to  our  law  of  mai^ginal-pairs  or  not  ? 

Onr  nnswpr  is  that  it  does  not.  It  is  as  little  of  a con- 
tradiction as  we  before  found  to  exist  between  the  proposition 
that  the  marginal  utility  determines  the  height  of  subjective 
value,  and  the  other  proposition  that  the  costs  determine  it. 
The  line  of  thought  which,  in  both  cases,  leads  to  the  solution 
of  the  apparent  contradiction  is  the  same,  feature  for  feature ; 
except  that,  in  the  present  case,  in  virtue  of  the  intervention 
of  exchange, — in  virtue,  that  is,  of  the  translation  of  the 
phenomena  out  of  individual  economy  into  social  economy, — 
there  appear  richer  developments  at  every  station  on  the  line 
of  thought. 

In  what  follows  I shall  try,  as  briefly  and  clearly  as 
possible,  to  describe  the  concatenation  between  Value.  Price, 
and  Costs,:  and  I think  I am  not  exaggerating  when  I say  that, 
to  understand  clearly  this  connection,  is  to  understand  clearly 
the  better  part  of  Political  EconomY- 

The  formation  of  value  and  price  takes  its  start  from  the 
subjective  valuations  nut  upon  finished  products  by  their  con- 
sumers. Tliese  valuations  determine  the  demand  for  those 
products.  As  supply,  over  against  this  demand,  stand,  in  the 
first  instance,  the  stocks  ol  hnished  commodities  held  hv^rb- 
ducers.  The  point  of  intersection  of  the  two-sided  valuations, 
the  valuation  of  tl^ie  marginal  pairs,  determines,  as  we  know. 
tlie  jiricR.  and,  of  course,  determines  the  price  of  each  kind  of 
product  separately.  Thus,  for  instance,  the  price  of  iron  rails 
is  determined  by  the  relation  of  supply  and  demand  for  rails ; 
the  price  of  nails,  by  the  relation  of  supply  and  demand  for 
nails  ; and,  similarly,  the  price  of  every  other  product  made 
out  of  the  productive  good  iron — such  as  spades,  ploughshares, 
hammers,  sheet-iron,  boilers,  machines,  etc. — is  determined  by 
tlie  relation  between  tlm  supply  and  demand  which  obtains  for 
these  special  kinds  of  products.  To  make  this  perfectly  clear, 
let  us  assume  tliab  tlie  relations  between  reqiiirements  and 
.<;tncks  of  the  various  iron  products — and,  accordingly,  their 
prices  to  begin  with— are  very  various ; that  the  price  of  a 
quantum  of  commodity  which  can  be  made  out  of  one  and  the 


CH.  VII  CONCATENATION  OF  VALUE,  PRICE,  COSTS  225 


same  unit  of  productive  material^ — for  instance,  from  a cwt.  of 
iron — varies  from  2 s.  for  the  cheapest  to  20  s.  for  the,  dearest 
class  of  products.  These  prices  are  the  result  of  the  position 
of  the  market  at  the  moment,  and  we  have  first  assumed  that 
the  stocks  of  products  (the  supply!  are  a q'iven  quantity.  But 
they  are  only  for  the  moment  a given  quantity.  As  time  goes 


on,  they  are  always  getting  supplemented  from  production,  and 
this  makes  them  a variable  quantity.  Let  us  follow  the  circum- 
stances of  this  production.  For  the  manufacture  of  iron  fabrics 
producers,  of  course,  require  iron.^  Under  the  system  of  division 
of  labour  they  must  buy  this  in  the  iron  market.  The  manu- 
facturers represent  this  demand  for  iron.  Asjegards  the  extent 
of  the  demand,  it  is  clear  tha,t  every  producer  will  buy  as  much 
iron  as  he  reqiiires  to  produce  that  amount  of  the  commodity 
which  he  may  expect  to  sell  among  his  customers.  But  how 
will  it  be  as  regards  the  intensity  of  the  demand  ? Obviously 
no  producer  will  give  more  for  the  cwt.  of  iron  than  he  can  get 
for  it^  from  his  own  customers  in  the  shape  of  price;  but,  up 
to  this  point,  even  in  the  worst  case,  he  can  and  will  compete 
rather  than  let  his  production  come  to  a standstill  for  want  of 
raw  material.  The  manufacturer,  therefore,  who  can  profitably 
employ  the  cwt.  of  iron  if  he  gets  20  s.  from  his  customers  will 
be  a buyer  in  the  iron  market  up  to  the  price  of  20  s.  as 
maximum ; he  who  can  profitably  employ  the  cwt.  of  iron  at 
16s.  will,  naturally,  not  buy  at  a price  over  16s.,  and  so  on. 
In  this  way  the  market  price  which  each  producer  of  iron 
wares  gets  for  his  particular  wares  (or  the  share  of  the  market 
price  which  falls  to  iron  according  to  the  law  of  complementary 
goods)  furnishes  hiin  with  the  ponfrptp  yalnat.inn  whipy  1-LP.  ling 
in  his  mind  when  joining  in  the  demand  forjron. 


^ To  simplify  the  matter,  we  shall  omit  for  the  moment  the  co-operation  of 
any  other  complementary  means  of  production. 

^ Again,  for  simplicity’s  sake,  I leave  out  the  other  requisites  of  production. 

® It  must  be  remembered  that  here  we  are  making  abstraction  of  the  co-opera- 
tion of  other  complementary  means  of  production,  as  Labour,  Tools,  Coal,  etc. 
If  otherwise,  of  course,  according  to  the  principles  laid  down  above  (p.  170)  on 
the  value  of  complementary  goods,  we  should  have  to  put  a portion  of  the  value 
of  the  product  to  the  account  of  the  other  co-operating  goods,  and  assign  only  a 
quota  of  the  product’s  value  to  the  iron.  But,  in  that  case,  exactly  the  same 
relations,  as  are  shown  in  the  text  to  exist  between  the  value  of  iron  and  the  full 
value  of  the  product,  would  hold  between  the  value  of  the  iron  and  that  quota  of 
the  product’s  value. 


Q 


226 


THE  LA  W OF  COSTS 


BOOK  IV 


The  supply,  which  stands  over  against  this  demand,  consists 
of  the  stocks  of  iron  held  by  the  mine-owneri~ahd  ironmasters. 
These  stocks  will  pass,  in  methods  familiar  to  us,  into  the 
possession  of  the  most  capable  buyers,  and  at  a price  which, 
approximately,  corresponds  to  the  valuation  of  the  last  buyer.^ 
Suppose  the  stocks  of  iron  are  sufficient  to  meet  the  demand 
of  all  those  buyers  who  value  iron  from  20  s.  down  to  6 s. 
per  cwt.,  tll£.^al nation _of  the  last  buyer,  and  thus  the  market 
pH^of  the  iron,  will  sta.nd  at  6s. 

And  now  we  have  to  consider  the  causal  connectiou  which 
has  ended  in  this  price.  It  runs,  in  the  clearest  pos.sible  way 
in  an  unbroken  chain  from  value  and  pxricp.  of  products  to  vplne 
and  price  of  costs — from  iron  wares  to  raw  iron,  and  not  con- 

j ^"ersely^  The  links  in  TEe~chain  are  these.  The,  valuation 
which  consumers  subjectively  put  upon  iron  products  forms  the 
first  link.  This  helps,  next,  to  determine  the  figures  of  the 
I valuation — the  money  price  at  which  consumers  can  take  part 
in  the  demand  for  iron  products.  These  prices,  then,  deter- 
mine, in  methods  with  which  we  are  now  familiar,  the 
resultant  price  of  iron  products  in  the  marke^t  for  such  pro- 
ducts. This  resultant  price,  again,  indicates  to  the  producers 
' the  (exchange)  valuation  which  they  in  turn  may  attach  to  the 
productive  material  iron,  and  thus  the  figure  at  which  they  may 
enter  the  market  as  buyers  of  iroji.  From  their  figures,  finally, 
results  the  market  price  of  iron. 

But  still  another  and  very  important  connection  may  be 
gathered  from  all  this.  It  is  that,  here,  we  have  simply  the 
great  law  of  marginal,  ^utility  fulfilling  itself.  According  to 
that  law  the  available  stock  of  goods  is,  successively,  conducted 
into^  the  most  remunerative  em^yments — put  to  the  most 
advantageous  uses, — and  the  last  use  to  which  the  goods  are 
put  "^termines  their  value.  In  any  individual  ^onomy  the 
most  remunerative  uses  are  seen  to  be  those  which  express  the 
most  urgent  subjective  wants,  and  the  value  which  emerges,  as 
result  of  these  individual  relations,  is  purely  personal  subjective 
value.  In  the  more  extended_sp]iere__of  a market,  on  the 
other  hand,  everything  is  referred,  no  longer  directly  to^sub- 
jective  wants,  but  to  those  wants  as  Tnp.di>.t,p.fl  by  money — 
money  being,  as  it  were,  the  neutral  commoTi  deunmiuntion-for* 
^ See  above,  p.  221. 


CHAP.  VII 


FROM  PRODUCT  TO  COSTS 


227 


wants  and  feelings  of  various  subjects  which  are  not  immedi- 
ately commensurable.  Here  emerge,  as  the  most  remun- 
erative employments,  not  those  which  express  the  wants 
absolutely  most  urgent,  but  those  which  are  represented 
by  the  highest  money  vnluatlon";  that  is.  the  ^st  paying 
employments;^  and  the  value  which  results  is  objective 
exchange  value.  Thus  it  is,  first  of  all,  with  iron  products. 
In  their  respective  markets  they  pass  to  the  best  paying 
buyers,  and  the  price  which  expresses  the  valuation  of  the  last 
buyer  determines  their  market  value  and  price.  But  so  it  is 
also,  in  the  second  nlace,  in  a slightly  roundabout  way,  with 

the  “ cost  good,”  iron,  itself.  In  the  iron  market  it  goes  to  the 

best  paying  producers,  and  the  valuation  of  the  last  of  these 
determines  its  price.  But  here  the  producers  are  simply 
mediators.  In  their  conducting  of  the  iron  to  the  best  paying 
consumers,  the  stock  of  iron  really  passes  successively  to  the 
most  remunerative  forms  of  consumption,  and  the  last  of  these 
forms  provided  for  determines — through  the  valuation  named 
by  the  last  producer  who  enters  the  market  as  buyer— the 
market  price  of  the  cost  good,  iron  It  is  not  this  cost  good, 
then,  that  dictates  its  fixed  price  to  the  products  that  proceed 
from  it ; on  the  contrary,  it  receives  its  own  price  hv  the, 
medium  of  the  price  of  its  products,  in  conformity  with  the 
great  law  of  marginal  utility,  according  to  which  the  available 
stock  is  forced  into  the  most  remunerative  employments,  and 
receives  its  price  from  the  money  valuations  of  the  last  of  these. 

But  connected  with  this  is  a series  of  subsequent  pheno- 
mena, which,  obviously,  have  given  rise  to  the  opinion  that 
costs  exert  a causal  influence  on  the  price  of  products.  So 

long  as  the  price  of  various  products  made  from  iron  varies 
between  20s.  and  2s.,  while  the  price  of  the  unit  of  iron  stands 
at  6s.,  it  is  an  evidence  that  the  economical  principle  which 
should  guide  the  stocks  of  iron  into  the  most  remunerative 
employments  is  not  fully  carried  out.  Iron  is  being  used  in 
employments  where  the  products  fetch  only  2s.  or  3s.,  where, 
accordingly,  the  use  is  less  than  the  “ last  ” economically  per- 
missible ; and,  on  the  other  hand,  there  are  still  numerous 

^ That  ttRse  two,  unfortunately,  are  not  usually  the  same  I have  shown  at 
length  in  Conrad’s  Jahrbiicher,  pp.  510-513,  when  discussing  the  causes  and  effects 
of  this  fact. 


228 


THE  LA  W OF  COSTS 


BOOK  IV 


employments  unprovided  for,  where  the  products  would  obtain 
a greater  value  than  6 s.  If,  for  instance,  the  market  price  of 
an  iron  product  stands  at  20s.,  it  is  a proof  that  only  those 
consumers  of  that  product  who  value  it  at  20  s.  and  upwards 
are  actually  purchasing,  while  other  consumers,  whose  valua^ 
tions  range  from  18s.  down  to  6s..  are  not  supplied  in  the 
mari^t.  Similarly  with  products  whose  market  price  stands 
at  163. ; there  will  be  an  unsatisfied  layer  of  demand,  with  a 
use  for  the  product  corresponding  to  the  prices  14s.  down  to 
6s.,  and  so  on.  Now  this  must  be  corrected — ^^and  the  enterprise 
of  Iinrlertakftr.q  will  nsnally  r»r.t  hp  long  in  .supplying  the  needed 
correction.  The  production  of  those  iron  wares,  the  price  of 
which  still  stands  above  6s.,  will,  under  the  inducement  of  the 
premium  offered  by  the  difference  between  price  and  cost,  be 
increased  till  all  those  employments  where  the  utility  is  greater 
than  the  amount  of  6 s.  are  supplied.  Of  course  this  increase 
of  supply  has  the  effect  of  always  reducing  the  level  in  which 
the  “last”  buyer  is  found,  and  thus  the  market  pri^p  ginVg^ 
till  such  time  as  the  money  valuation  of  the  last  buyer, 
and  with  it  the  market  price,  comes  to  the  normal  level  of  .6s. 
Conversely,  where  iron  has  been  put  to  employments  whose 
products  fetch  less  than  6s.,  the  loss  that  ensues  will  prevent 
more  iron  being  thus  employed.  This  will  be  brought  about  by 
a temporary  suspension  or  limitation  of  the  production  of  those 
iron  wares,  the  market  price  of  which  is  under  6 s.  This  limita- 
jjoTi  n£  supply  will  soon  have  the  effect  of  raising  the  price  to 

6s... and  now,  as  the  state  of  the  case  demands,  the  commodity, 
iron,  will  only  be  attainable  by  those  buyers  who  can  use  it  to 
make  products  that  will  fetch  at  least  6 s.  Thus,  from  above 
and  from  below,  all  iron  products  come  together  at  the  price  of 
6s.,  the  amount  of  their  costs ; but,  quite  evidently,  the  cause 
of  this  is  net  that  the  cost  good,  iron,  can  force  its  own 
arbitrary  fixed  price  on  its  products,  but  that  all  the  products 
involved,  including  the  cost  good,  iron,  conform  to  the  law  of 
marginal  utility,  find  their  way  successively  into  the  most 
remunerative  employments,  and  togethex-xeceive  their  price  as 
regulate  by  the  last  of.  these.^ 


1 It  is  possible  that-  the  amount  of  costs  may  itself  be  shifted — raised,  for 
instance — by  the  process  of  correction  just  described.  It  may  happen,  that  is  to 
say,  that  in  order  to  satisfy  the  demand,  hitherto  unsatisfied,  which  is  desirous 


CHAP.  VII 


FROM  PRODUCT  TO  COSTS 


229 


Empirical  proofs  of  this  may  be  had  ia  abundance.  It  is 
a very  well  known  fact  that  active  building  of  railways  raises 
the  price  of  rails,  and,  through  this,  the  price  of  iron;  that  the 
present  strong  demand  for  copper  wire  in  electric  lighting^uts 
up  the  price  of  coppeE  In  these  cases  iTis  evident  that  the 
upward  movement  of  price  takes  its  start  from  the  finah 
products,  and  is  transferred  from  these  to  the  cost  goods. 
But  the  objection  will  probably  suggest  itself  to  many  readers, 
that  there  are  also  cases  where  the  movement  of  price  is 
from  costs  to  nroducts.  The  stocks  of  iron,  for  instance,  of 
which  we  have  been  speaking  in  our  illustration,  are  not  a 
fixed  amount,  but  are  smaller  or  greater  according  to  the 
circumstances  of  iron  production.  Now  if  there  is  an  exten- 
sion of  this  production,  and  the  supply  of  iron  increases,  its 
price  will  certainly  fall,  and  that  from  causes  peculiar  to  the 
iron ; and  this  fall  in  prices  will  drag  down  the  price  of  iron 
wares.  Does  the  causal  connection  here  not  run  from  co.sts  to 
price  of  products  ? 

To  answer  this  objection  we  have  only  to  carry  the  con- 
catenation, of  which  we  have  hitherto  examined  only  a few 
links,  back  to  its  beginning.  It  is  quite  correct  to  say  that 
stocks  of  iron  are  not  a fixed  amount,  but  the  varying  result  of 
a production  which  is  capable  of  being  extended  or  limited  at 
will.  For  the  productionof  iron  two  things  are  necessary, — 
mines,  and  (to  put  it  shortly)  direct  and  indirect  labour. 
The  mines  are  a given  quantity,  and  cannot  be  devoted  to 
the  production  of  anything  but  iron.  On  the  other  hand, 
the  quantity  of  labour  available  as  a whole  for  economical 
emplojnnent,  is  an  amount  given  and  limited  by  the  current 
state  of  population,  but  this  is  not  the  case  with  that  particu- 
lar labour  which  is  employed  in  the  production  of  iron.  Labour 
is  a productive  power  capable  of  being  employed  in  any  number 
of  ways,  and  all  the  branches  of  production  carried  on  in  the 
community  compete  for  it.  Who  or  what,  now,  is  it  that 
decides  what  exact  proportion  of  the  original  productive  powers 

of  buying  iron  products  at  a higher  price  than  6s.,  so  much  iron  is  taken  out  of 
the  iron  market  that  the  stock  is  uo  longer  sufficient  for  the  demand  that  is 
willing  to  pay  just  6s.  This  latter,  then,  will,  of  course,  be  shut  out  by  the 
stronger  competitors,  and  the  market  price  settles  at  a higher  figure  than  6s. — 
another  proof  that  costs  are  not  the  fixed  point  to  which  the  price  of  products 
adapts  itself,  but  vice  versd. 


230 


THE  LA  W OF  COSTS 


BOOK  IV 


at  the  disposal  of  industry,  namely  labour  aorl  ospr  of  lanrl^  jg 
employed  in  the  production  of  iron,  and  who  and  what  is  it  that 
decides  on  the  value  and  price  of  the  unit  of  those  productive 
powers  ? 

Here,  then,  for  the  last  time,  is  repeated,  in  the  elements 
of  all  economy,  the  movement  which  we  saw  in  the  case  of 
final  products  and  intermediate  products.  The  original  pro- 
djiptdve  powers  of  the  nation  force  themsplvas  into  the  most 


smunerative  employments  one,  altar  another.,  and  receive  their 


value  and  price  from  tho  last  of  these.  As  little  as,  perhaps 
even  less  than,  any  other  good  have  they  any  a priori  fixed 
value : they  receive  it  only  from  the  opportunities  of  employ- 
ment. Whether  the  day’s  work  is  worth  2 s.  or  6 s.  depends 
on  the  worth  of  the  product  which  can  be  turned  out  in  the 
day’s  work,  and,  indeed,  on  the  “ last  ” product — the  one  worst 
paid — for  the  production  of  which  there  is  still  enough  labour 
of  the  necessary  quality  left,  after  all  the  better  paid  employ- 
n^ts  have  been  supplied. 

' Production  mav  be  compared  to  a giairt_pump.  Every 
branch  of  want  has  its  separate  pipe  sunk  down  to  the  great 
reservoir  of  the  original  productive  powers,  and  competes  with 
all  the  other  branches  of  want  in  trying  to  draw  its  supply 
by  suction  from  that  reservoir.  Every  branch  has  a different 
power  of  suction,  the  power  increasing  with  the  number  and 
the  remunerativeness  (that  is  to  say,  in  the  case  of  organised 
exchange,  the  money  value)  of  the  employments  it  embraces. 
In  the  nature  of  the  suction  pipes,  too,  there  is  a difference. 
Many  are  quite  simple : others  have  independent  intermediate 
lengths,  that  convey  the  pressure  that  comes  from  the  want, 
as  it  were,  by  stages ; and,  in  correspondence  with  that,  the 
productive  powers  which  supply  the  want  are  raised  by  stages. 

The  sumle  extends  still  furtlier.  Such  wants  as  demand 
personal  services  for  their  satisfaction,  attract  labour  quite 
directly,  according  to  the  payment  which  they  can  and  will 
give  for  them.  Such  wants,  again,  as  demand  material  goods 
for  their  satisfaction,  get  these  supplied,  first,  by  payment  of  a 
market  price  which  is  remunerative  in  itself,  and  then  the 
remunerative  price  of  the  products  must  attract  the  productive 

powers  to  their  manufacture.  Sometimes  this  is  done  through 
one  or  two,  sometimes  through  twenty  or  thirty,  members.  In 


CHAP.  VII  PRODUCTION  A KIND  OF  GIANT  PUMP 


231 


our  illustration,  human  demand  asked  and  paid  for  iron  wares  : 
the  market  price  of  iron  wares  attracted  people  to  the  purchase 
of  iron  : the  price  of  iron,  finally,  attracted  the  original  prp- 
ductive  powers  to  the  production  of  iron.  In  the  case  of 
other  consumption  goods,  the  number  of  intermediate  members, 
or,  to  keep  to  the  terms  of  our  comparison,  the  number  of 
intermediate  lengths  in  the  suction  pipe,  may  be  double  or 
twenty  times  as  great.  But  the  principle  of  the  movement, 
and  what  chiefly  interests  us,  the  result,  is  always  the 
same.  -Whether  there  are  many  or  few  intermediate  mem- 
bers may  hasten  or  hinder  the  result,  hut  it  cannot  weaken__or 
strengthen  it : in  the  end  every  want,  according  to  the  power 
expressed  by  its  money  valuation,  draws  to  itself,  mediately  or 
immediately,  the  productive  powers  required  for  its  supply. 
To  supply  the  wants  of  the  rich  innumerable  productive  powers 
are  always  active,  even  if,  simultaneously,  at  other  points  of 
the  economy,  there  is  want  both  of  men  and  goods.  The 
reason  of  this  is  that  the  high  figures,  which  the  rich  are  able 
to  offer  for  the  satisfaction  of  their  wants,  never  fail  to  exert 
and  continue  their  attractive  force  through  all  the  stages  of 
production,  right  down  to  the  reservoir  of  the  original  productive 
powers. 

Thus  all  human  wants  exert,  as  it  were,  a suction  power 
indicated  by  the  figures  of  their  valuation.  Now,  that  layer  of 
wants  whiclTTs  willing  and  able  to  pay,  say,  20s.  and  upwards, 
for  the  day’s  work  devoted  (mediately  or  immediately)  to  its 
satisfaction,  is  soon  entirely  provided  for.  After  it  those  layers, 
in  succession,  draw  supply  to  themselves  which  can  and  will 
pay  the  day’s  labmir  with  18s.,  16s.,  14s.,  and  12s.,  even  down 
to  10s.,  8s.,  6s.,  and  4s.  If,  at  the  limit  of  4s.,  the  entire  stock 
of  original  powers  is  required  and  is  taken,  this  decides  two 
things : — All  wants  which  will  not,  or  cannot,  pay  the  day’s 
labour  devoted  to  their  service  at  4s.,  remain  unsupplied ; and 
the  market  price  of  the  day’s  labour  will  stand  at  the  figure  of 
the  last  buyer,  namely,  4s.  But  if,  as  we  may  rather  assume, 
theavailable  quantity  oF  labour  is  greater  than  this,  the  wants 
of  still  lower  levels  may  be  supplied.  The  last  needs — mediate 
or  immediate — which  are  supplied  may  be  those  that  pay  the 
day’s  labour  at  2s.  only ; and,  in  conformity,  the  market  price 
of  labour  also  will  be  fixed  at  this  lower  figure  of  2ii.  And, 


232 


THE  LA  IV  OF  COSTS 


BOOK  IV 


indeed,  this  market  price  wUl  be  a general  one : the  uppermost 
layer  will  not  be  paid  20s.,  and  the  lowest  layer  2s.  for  the 
same  work  or  the  same  commodity : the  market  price  will  he 
the  same  for  all  buyers. 

And  now  we  come  in  sight  of  the  answer  to  the  doubt 
suggested  by  ouTformer  illustration.  Suppose  that  the  price 
of  the  day’s  labour  is  2 s.,  an3~the  price  of  a cwt.  of  iron,  which 
takes  three  days  to  produce,  is  6 s.  Suppose  now  that,  all  of  a 
sudden,  new  and  productive  mines  are  opened?  or  some  great 
improvement  in  process  discovered,  which  makes  it  possible  to 
produce  the  cwt.  of  iron  in  two  days’  labour.  What  is  the 
consequence  ? So  long  as  the  iron  and  its  products  maintain 
the  old  price  of  6 s.,  only  those  wants  in  the  department  of 
iron  wares  are  supplied  which  are  able  and  willing  to  pay  6 s. 
for  two  days’  work  ; that  is,  to  pay  the  day’s  labour  at  the  rate 
of  3s.,  while  all  round,  in  all  other  departments  of  want  and 
branches  of  production,  that  layer  of  want  is  supplied  which 
pays  only  2s.  for  the  day’s  labour.  On  economic  principles — 
which  are  willingly  carried  out  by  undertakers  of  industry,  who 
^ are  always  ready  to  seize  the  chance  of  a profit  when  offered 
opportunities  of  employment  which  pay  the  day’s 
re  than  2s.,  and  have  hitherto  been  unsupplied, 
supplied  : more  original  productive  powers  will, 
be  invested  in  the  production  of  iron ; apd  tha- 
supplv  of  iron  and  iron  products  will  be  inr.rpasp.d  till  such 
time  as,  here  as  elsewhere,  that  level  of  wants  which  is  willing 
A to  pay  the  day’s  labour  at  2 s.  is  satisfied,  and  therefore  the  cwt. 
of  iron,  which  costs  two  days’  labour,  fetches  4s.  Parallel  with 
this,  of  course,  the  price  of  iron  and  iron  products  ^ goes  down 
to  the  level  of  4s.  And  all  this  is  not  in  opposition  to.  but  in 
real  fulfilment  of  our  law  of  Marginal  Utility,  of  which  the  law 
of  costs,  rightly  understood,  is  only  a special  expression  suitable 
to  a special  group  of  phenomena. 

1 It  must  not  be  forgotten  that  we  are  simphfyiiig  the  matter  by  leaving  out 
of  account  the  co-operation  of  other  complementary  goods  in  the  production  of 
iron  products.  If  we  were  to  take  these  into  consideration,  and  assume,  for 
instance,  that,  to  change  the  iron  into  the  iron  product,  the  expenditure  of  other 
two  days  of  immediate  or  mediate  labour  was  necessary,  then  8s. , as  the  price  of 
iron  product,  would  correspond  to  4s.  as  the  price  of  iron,  and  of  this,  according 
to  the  law  of  complementary  goods,  4s.  would  be  reckoned  to  the  productive  good, 
iron,  as  its  share. 


them — those 
work  at  moi 
will  now  be 
accordingly. 


CHAP.  VII 


DISTURBING  CAUSES 


233 


If- — what  is  practically  inconceivable — production  were 
carried  on  in  ideal  circumstances,  unfettered  by  limitations 
of  place  and  time,  with  no  friction,  with  the  most  perfect 
knowledge  of  the  position  of  human  wants . requiring  satis- 
faction, and  without  any  disturbing  changes  of  wants,  stocks, 
or  technique,  then  the  original  productive  powers  would, 
with  ideal  and  mathematical  exactitude,  be  invested  in  the 
most  remunerative  employments,  and  the  law  of  costa,  so  far  aa 
we  can  speak  of  such  a law,  would  hold  in  ideal  completeness. 
The  complementary  groups  of  goods  from  which,  in  the  long- 
run,  the  finished  good  proceeds,  would  maintain  exactly  the 
same  value  and  price  at  all  stages  of  the  process ; the  com- 
modity would  be  exactly  equal  to  its  costs  ; these  costs  to  their 
costs,  and  so  on,  hack  to  the  last  original  productive  powers 
from  which  ultimately  all  goods  come.  But  this  ideal  svm^ 
metry  is  traversed  by  two  disturbing  j;auses. 

The^'''fii^r~of  these  I may  call  by^j^he  general  name  of 
Friction.  Almost  invariably  there  is  some  hindrance,  great 
or  small,  permanent  or  temporary,  to  the  due  investment  of 
the  original  productive  powers  in  the  employments  and  forms 
of  consumption  which  are  the  most  remunerative  at  the  time. 
In  consequence  the  provision  for  wants,  and  likewise  the  prices, 
are  somewhat  unsymmetrical.  Sometimes  it  is  that  individual 
branches  of  want  are,  relatively,  more  amply  supplied  than 
others ; so  that,  for  instance,  in  woollens,  those  wants  are  supplied 
which  pay  the  day’s  labour  indirectly  at  Is.  8d.  only,  while  it 
may  be  that,  in  copper  goods,  no  wants  are  satisfied  which  can- 
not pay  3s.  for  a similar  day’s  labour.  But  sometimes  it  may 
be  that  groups  of  productive  materials,  successively  transformed 
till  they  are  changed  at  last  into  the  finished  commodity,  are  not 
equally  valued  at  all  stages  of  the  process.  If  we  compare  the 
means  of  production  to  a,  Rtrea.-m  . we  might  say  that  the  .strearu.is. 
not,  as  it  should  he,  of  equal  breadth  at  all  stages  of  its  course: 

from  some  disturbing  cause  or  other  there  may  be  dams  at 
certain  particular  points,  and  leakages  at  others;  and  these  cause 
an  unsymmetrical  divergence  of  price  compared  with  the  priees 
obtained  at  stages  before  and  after,  or,  as  it  is  usually  con- 
ceived and  expressed,  a divergence  of  the  price  of  a product  (or 
intermediate  product)  from  its  costs.  Thus  it  is,  in  our  illustra- 
tion of  the  iron,  when  production  is  suddenly  cheapened  from 


234 


THE  LA  VV  OF  COSTS 


BOOK  IV 


6s.  to  4s.  As  a consequence  the  production  of  iron  is  at  first 
increased,  and  presses  down  the  price  of  raw  material,  wliile 
the  products  of  iron  may  still  for  some  time  maintain  a price 
greater  than  their  costs.  But  gradually  the  increase  of  supply 
presses  forward  to  the  later  stages  of  production, — passes  from 
the  production  of  raw  materials  to  the  manufacture  of  final 
products, — and  by  reducing  the  price  here  also  to  4s.  restores 
the  disturbed  symmetry  between  pidce  and  costs. 

In  practical  life  such  frictional  disturbances  are  innumer- 
able. At  no  moment  and  in  no  branch  of  production  are 
the^  entirely  absent.  And  thus  it  is  that  the  T.aw  of  Costs 
is  recognised  as  a law  that  is  only  approximately  valid.:  a 
law  riddled  through  and  through  with  exceptions.  These  in- 
numerable exceptions,  small  and  great,  are  the  inexhaustible 
source  of  the  undertakers’  profits,  but  also  of  the  undertakers 


’ es. 


The  second  disturbing  c^use  is  the  Lapse  of  Time — the 
weeks,  months,  years  which  must  stretch  between  the  inception 
of  the  original  productive  powers,  and  the  presentation  of  their 
finished  and  final  product.  The  difference  of  time,  in  exerting 
a far-reaching  influence  on  our  valuation  of  goods,  makes  a 
normal  difference  between  the  value  of  the  productive  groups 
standing  at  different  points  of  the  production  process  through 
which  they  must  all  pass ; and  is,  therefore,  a difference  to  be 
kept  quite  distinct  from  the  unsymmetrical  divergences  caused 
by  frictional  disturbances.  It  is  this  second  disturbing  cause 
which  gives  rise  to  Interest.  Our  further  task  will  be  to 
intercalate  the  theory  of  interest  in  its  place  within  the  value 
and  price  theory  already  outlined. 


BOOK  V 


PEESENT  AND 


FUTUEE 


CHAPTER  I 


PRESENT  AND  FUTURE  IN  ECONOMIC  LIFE 

Present  goods  are,  as  a rule,  worth  more  than  fattire  goods 
of  like  kind  and  number.  This  proposition  is  the  kernel  and 
centre  of  the  interest  theory  which  I have  to  present.  All 
the  lines  of  explanation,  by  which  I hope  to  elucidate  the 
phenomena  of  interest,  run  through  this  fact ; and  round  it, 
both  essentially  and  superficially,  is  grouped  the  whole  of  the 
theoretical  work  we  have  to  do.  The  first  part  of  mir 
planation  will  trv  to  prove  the  truth  of  the  propn.sit.iou  : the 

second  will  then  show  that,  out  of  the  fact,  spring,  naturally 
and  necessarily,  all  the  manifold  forms  which  the  phenomena 
of  interest  take.  In  the  present  book  we  have  to  take  up  the 
first  part,  and  I shall  try  to  go  into  it  with  that  minuteness 
which  is  due  to  the  cardinal  importance  of  such  a proposi- 
tion. To  this  end  we  sViall  firgl.  all,  -maVp  .g  prpnorgl  anr- 
vev  of  the  relations  between  present  and  future  in  human 
economy — a subject,  obviously,  of  the  highest  importance,  but 
one  which,  strangely  enough,  has  up  till  now  attracted  but 
scanty  scientific  attention.^ 

1 A history  of  the  theory  of  this  subject — which  I have  no  intention  of 
writing  here — would  probably  start  with  Adam  Smith’s  emphatic  opposition  of 
“present  enjoyment”  to  “future  profit”  (ii.  1).  In  more  recent  times  there 
are  some  good  observations  on  the  subject  in  Senior  {Political  Economy,  third 
edition,  p.  58)  under  the  headings  of  “ Abstinence  ” and  “ Capital  ” ; in  Rae  {New 
Principles  of  Political  Economy,  quoted  in  Mill’s  Principles,  book  i.  chap.  xi. ) ; 
and  in  Menger  {Grundsdtze  der  Vollcswirthschaftslehre,  p.  127).  The  first,  so 
far  as  I know,  to  treatjt  as  a subject  by  itselfLwas-Jeyons  {Theory  of  Political 
Economy,  1871,  second  edition,  1879).  Jevons’s  work  is  exceedingly  interesting 
and  suggestive,  but,  on  the  whole,  it  is  rather  imperfect — as  could  scarcely  be 
otherwise  in  a first  attempt,  and  on  a field  of  speculation  hitherto  all  but  un- 
touched. It  shows  a good  deal  of  incorrectness,  a good  many  contradictions, 
and,  in  particular,  many  obvious  gaps.  Jevons  may  be  said  rather  to  have 


238  PRESENT  AND  FUTURE  IN  ECONOMIC  LIFE  book  v 


In  the  present  we  live  and  move,  but  our  future  is  not  a 
matter  of  indifference  to  ns^  and  our  desires  are,  with  reason, 
directed  towards  a wellbeing  not  limited  by  the  present.  It  is 
only  as  the  logical  carrying  out  of  this  general  principle  that 
we  set  before  us,  in  our  economical  arrangements,  the  larger 
object  of  providing  for  our  future  as  weU  as  for  our  present 
weUbeing.  As  a fact,  the  future  has  a great  place  m opj- 
economical  provision : a greater,  indeed,  than  people  usually 
think.  It  is,  of  course,  a commonplace,  but,  all  the  same,  it 
is  a truth  seldom  seen  in  all  its  bearings,  that  our  economical 
conduct  has  exceedingly  little  reference  to  the  present,  but  is, 
almost  entirely,  taken  up  with  the  future. 


( 


shown,  by  a bold  stroke  of  genius,  that  here  was  a new  circle  of  ideas  waitinfr 
to  be  taken  up,  than  shown  what  was  to  be  done  with  them.  Closely  following 
Jevons,  without  going  beyond  their  master,  are,  quite  recently,  Launhardt 
{Mathemalische  Begriindung  der  Volkswirthschaftslehre,  1885)  and  Emil  Sax 
{Grundlegung  der  theoretisehen  Stoats wirthschaft,  1887,  pp.  178,  313).  A little 
before  these  G.  Gross  {Die  Zeit  in  der  Volkswirthschaft,  in  the  Zeitschrift  fur  die 
ges.  Staatswissenscha/t,  1883,  p.  126)  had  made  a well-meant  suggestion, — which, 
however,  was  by  that  time  carried  out  by  Jevons  and  then  by  myself, — that  the 
element  of  time  in  economical  theory  was  worthy  of  a fuller  consideration. 
Finally,  as  concerns  mv  own  work,  I owe  it  to  myself  to  say  that  I arrived  at 

my  views  on  this  subject  in  comnlete-indeiLejidence.  and  altogether  uninfluenced 
by  Jevons — and,  naturally,  still  less  by  later  writers.  I first  became  acquainted 
with  Jevons’s  writings  in  1883, — shortly  before  the  printing  of  my  Capital  and 
Interest, — when  completing  the  historical  material  already  collected  in  that  work 
by  a review  of  the  latest  English  literature  on  the  subject.  The  principles  of 
iny  own  theory  of  capital,  on  the  other  hand,  were  laid  down  by  me  as  early 
as  1876.  In  that  year  I first  suggested  them  in  a youthful  work  never  published. 
In  later  writings  I gave  many  plain,  if  still  cautious,  hints  of  my  leading  ideas 
{e.g.  in  Rechte  und  Verhdltnisse,  p.  68  in  note  bn  the  phenomenon  of  Abniitzung, 
pp.  76  and  particularly  109,  115  in  note,  on  the  computation  of  the  future  use, 
and  p.  152  ; in  Capital  and  Interest,  pp.  257,  276,  343,  424,  and  particularly 
on  p.  428  where  I formulated  the  programme  of  my  positive  theory  in  saying 
that  the  explanation  of  interest  was  to  be  deduced  from  the  influence  of  Time 
on  human  valuations  of  goods).  The  cautious  tone  which  I still  deliberately 
adopted  in  giving  these  hints  was  due  to  my  desire  not  to  compromise  my  new 
ideas  by  any  premature  or  incomplete  formulation  of  them.  I meant  that  they 
should  not  go  before  the  public  till  I was  in  a position„tQ  produce  them-a.S-a, 
finished  whole,  all  harmoniously  fitted  in  to  a system  of  carefully  planned 
economic  doctrine.  That  is  why  I preferred  to  work  for  ten  years  at  laying 
the  foundation  of  the  present  theory  by  completing  the  theory  of  goods  (18811.  the 
criticism  of  the  theories  of  capital  (1884),  and  the  theory  of  vf^m  (1886),  rather 
than  snatch,  as  I might  easily  have  done,  at  the  glory  of  priority  by  publishing 
original  but  still  immature  ideas  a decade  earlier.  Moreover  my  theory,  if  it 
touches  that  of  Jevons  at  several  points,  by  no'  means  agrees  with  it  in  essence  ; 
and  in  the  most  important  points,  such  as  the  explanation  of  interest,  it  is  in 

distinct  opposition  to  his. 


CHAP.  I 


JEVONS 


239 


Let  us  clearly  understand  what  this  latter  statement 
means.  It  means  that  our  anxiety  in  the  present  is  to  have  / 
pt  nnr  di.^pn.cial,  in  the  future,  means  for  the  satisfaction  of  / 

wants  that  will  not  emerge  till  the  future.  In  other  words, 

it  means  that  pleasures  or  pains,  which  we  will  only  experience 
in  the  future,  determine  las  now  to  provide  goods  or  services, 
which,  again,  will  only  assert  their  use  in  the  future.  But 
how  is  it  possible  that  feelings  which  are  not  yet  felt,  and 
therefore  feelings  which,  essentially,  do  not  exist,  can  be 
motives  to  will  and  deed  ? 

Xow,  as  a suggestive  \vriter  has  said,  we  do  rint-ijideed 
possess  the  gift  of  feeling  future  sensations,  but  we  possess  the 

other  gift  of  anticipating  them  in  imagination.^  Either  it  is 

1 When  Jevons  calls  that  intellectual  phenomenon  which  impels  us  to  provide 
for  future  wants  and  to  value  future  goods,  a “present  anticipated  feeling” 
{Political  Economy,  second  edition,  p.  37),  the  expression  is  very  apt  to  be  mis-^ 
leading.  We  must  distinguish  between  two  fundamentally  distinct—things. 
which  Jevons  seems  to  me  not  to  have  sufficiently  kept  apart.  It  is  one  thing 
to  represent  to  ourselves,  or  imagine,  a future  pleasure  or  future  pain,  and  to 
estimate  its  presumable  intensity  on  the  ground  of  this  imagination.  It  is  quite 
another  thing  to  experience,  in  this  imagination  itself,  a pleasure,  an  actual 
present  pleasure  of  anticipation.  To  give  an  example.  I think  of  taking  a 
pleasure  trip  to  Italy.  From  personal  experiences,  or  from  travellers’  tales  heard 
or  read,  T represent  to  myself  the  pleasures  of  the  journeY,  and  I put  the  intensity 
of  these  pleasures  so  high,  that  it  seems  to  me  worth  the  sacrifice  of  £50  to 
realise  them’  But,  beyond  this,  in  picturing  to  myself  the  future  pleasure  of 
the  journey,  a real  present  pleasure  of  anticipation  is  kindled.  Thinking  on 
the  journey  affords  me  an  actual  pleasure,  but,  in  any  case,  it  is  an  entirely 
different  pleasure  and,  in  all  probability,  its  intensity  is  ever  so  much  less  than 
the  pleasure  of  the  journey  itself.  If  I value  the  latter  at  £50,  the  pleasure  of 
anticipation  is,  perhaps,  not  worth  more  than  lOs. — of  which  it  may  be  sufficient 
proof  that  I am  willing  to  lay  out  so  much  money,  and  no  more,  in  buying  a 
book  of  travels  that  lifts  me  into  the  pleasant  world  of  thought.  The  concrete 
figures  here  are  of  no  moment.  Ho  constant  or  normal  quantitative  relation  can  ■ 
be  established  between  unanticipated  pleasure  and  a pleasure  of  anticipation  : t^ 
relation  will  vary  in  the  wildest  way  according  to  persons,  motives,  and  circum- 
stances. With  dreamy  imaginative  men,  for  instance,  who  are  apt  to  be  strongly 
excited  by  their  own  imaginings,  the  pleasures  of  anticipation  may  be  relatively 
strong ; with  hard-headed  unimpassioned  men,  on  the  other  hand,  they  will  be 
disproportionately  weak.  For  our  nurpose  it  is  sufficient  to  establish  two  things 
first,  that  the  intensity  of  the  represented  future  pleasure  and  that  of  the  actually 
felt  pleasure  of  anticipation,  are  two  different  quantities  and  second,  in  the  vast  j 
majority  of  cases,  the  intensity  of. the  pleasure  of  anticipation  is  less  than  the  \ 
anticipated  pleasure,  not  by  a few  per  cent,  but  infinitely.  ' 

The  question  now  is  : When  we  value  future  goods,  and  when  in  conformity 
with  that  valuation  we  are  making  these  economical  determinations  on  which  we 
provide  for  future  wants,  with  which  of  these  two  intensities  have  we  to  do  ? On 


240  PRESENT  AND  FUTURE  IN  ECONOMIC  LIFE  book  v 


that  wft  hn,vp!  alrofidv  in  the  past,  once  or  many  ±imes_£xperienced 
\Xtlip,  samo  want  as  we  expect  in  the  future,  and  retain  a picture 

tliis,  at  any  rate,  there  can  be  no  doubt : we  shall  all  agree  that  it  ia  the  intensity 
of  tlie  future  pleasure  (or  of  the  averted  future  pain)  valued  on  the  representation 

or  imagination  of  it.  A good  which  1 have  every  reason  to  expect  will  bring  me 

an  intensity  of  satisfaction  indicated  by  100,  I shall  value  at  100  and  not  at  1, 
even  if,  in  anticipating  the  same,  I experience  only  an  actual  pleasure  of  anticipa- 
tion of  the  intensity  1.  And,  in  the  same  way,  in  choosing  whether  I shall 
provide  for  any  definite  future  want,  in  general,  or  to  which  of  several  I should 
give  the  preference,  I shall  try  to  decide,  as  impartially  as  possible,  according  to 
my  reasonable  valuation  of  the  future  pleasure,  and  not  according  to  the  degree 

of  my  momentary  feeling  of  pleasure.  (That  we  not  seldom  have  our  clear  judg- 

ment clouded  by  the  latter,  and  that  it  thus  obtains  an  indirect  influence  on  our 
determinations,  is  a phenomenon  which  belongs  to  quite  another  sphere.)  If, 
after  what  has  been  said,  there  should  still  be  any  doubt  on  the  subject — which 
I do  not  anticipate — it  may  be  removed  by  pointing  to  the  well-known  fact,  that 
enthusiastic  dreamers,  in  whom  the  anticipation  of  future  events  excite  very 
lively  present  emotions,  are  not  at  all  the  sort  of  people  who  are  given  to  provide 
economically  for  their  future  needs  in  the  most  efficient  way.  On  the  contrary, 
it  is  the  cold  calculating  men  who  do  so  ; men  whose  sober  intellectual  judgment 
of  future  situations  is  little  or  not  at  all  affected  by  accompanying  excitement. 

Now  Jevons  has  fundamentally  confused  these  things.  He  makes  out  that 
our  economical  transactions  have  for  their  motive  present  feelings,  which,  accord- 
ing to  the  distance  of  time,  remain  a few  per  cent  behind  the  intensity  of  future 
pleasures  and  pains — standing  to  the  latter,  perhaps,  in  the  ratio  of  95  to  100. 
But  nothing  is  more  certain  than  that,  while  we  represent  to  ourselves  feelings  of 
that  intensity  and  anticipate  them,  we  do  not  experience  them  as  present  feelings. 
Sax,  again,  who,  in  this  respect,  has  obviously  followed  Jevons  without  proving 
the  facts  of  the  case  for  himself,  has  made  the  same  blunder  in  a ruder  way. 
He  speaks  of  a Tm'empjindung  of  future  wants — to  be  distinguished  from  a 
simple  prescience  {Grundlcgung,  p.  178),  and  out  of  these  “previous  feelings” 
ho  even  construes  actual  “present  wants”  and  “feelings  of  want,”  which  should 
be  only  a little  weaker,  according  to  the  distance  of  time,  than  the  corresponding 
immediate  want  of  the  present  itself  (p.  314).  Surely  Sax  has  scarcely  considered 
what  tortures  we  must  constantly  endure  if  all  the  future  pleasures  and  pains, 
against  which  we  protect  ourselves  by  forethought,  are  really  to  be  experienced 
by  us  in  anticipation,  and  only  a few  per  cent  less  vividly  than  in  reality  ! — Let 
me  add  the  following  remark.  I am  quite  aware  that  the  psychologists  attach 
two  distinct  conceptions  to  the  words  “feeling”  and  “sensation”  {GefiXhl  and 
Empfiiidung).  The  speech  of  economics,  however,  has  not  yet  carried  out  this 
distinction  and  it  is  usual  to  speak  either  of  sensations  or  feelings  of  want,  pain, 
and  so  on.  I retain  these  common  expressions  because,  by  giving  them  up,  I 
should  probably  lose  more,  among  economic  readers,  in  plainness,  than  I could 
gain  in  exactness. 

Note  by  Translator. — I may  suggest  here  that,  so  far  as  concerns  Jevons.  the 
above  criticism  scarcely  anulies.  It  is  based  on  a literal  reading  of  two  unfortunate 
expressions,  “ present  anticipated  feeling  ” and  “ vague  though  powerful  feeling  of 
the  future.”  The  whole  passage,  however,  shows  that  Jevons  did  not  mean  the 
present  feeling,  but  the  represented  future  feeling — what  he  himself  calls  the  “ actual 
amount  of  feeling  anticipated.”  The  criticism,  however,  probably  finds  its  mark  in 
those  German  writers  who  have  too  faithfully  followed  the  letter  of  Jevons. — W.  S. 


CHAP.  I 


ANTICIPA  TION 


241 


of  it  in  o»p  THFiTnnry ; or,  at  least,  W8  have  already  experienced 
wants  or  feelings  that  bear  a certain  resemblance  to  the  feelings 
we  are  expecting,  and  can,  from  such  analogous  reminiscences, 
construct  for  ourselves  an  imaginative  picture  which  is  more 
or  less  true.  On  such  pictnre.s  of  memn-ry  and  in-iapiii,q- 
Ijon  we  ba.<^e  niiv  p.eonomicn.l  calculations  and  our  economical 

decisions,.  Certainly,  as  many  a one  wHi  be  apt  to  object,  it 
is  an  unsafe  and  deceptive  foundation,  but,  all  the  same,  it  is 
almost  the  only  one  that  we  have.  It  is  the  rarest  possible 
thing  for  us  to  base  a valuation  of  goods,  or  an  economical 
decision,  on  a pain  that  we  are  feeling  at  the  very  moment. 
It  is,  indeed,  one  of  the  characteristic.^  of  n.  civilised  community 
rhat  it  anticipates  want  by  providing  for  it,  and  does  not 
allow  the  pain  of  emptiness,  which  the  unsatisfied  want  would 
involve,  to  get  to  its  full  height.  We  do  not  begin  to  prepare 
our  meals  when  hunger  has  reached  its  highest  point  of 
torment : we  do  not  wait  till  the  flood  has  overwhelmed  house 
and  home  before  we  think  of  putting  up  the  dam : we  do  not 
delay  building  the  fire-engine  till  the  flames  have  broken  over 
us.  At  the  moment  when  we  decide  on  an  economical  action. 
the  wants  which  cause  us  to  make  the  decision  are,  abrio.st 
always,  in  the  future,  and  so,  however  near  that  future  may 
be,  they  are  acting  on  us,  not  as  actual  feelings,  but  as  simple 
anticipations.  How  many  a man  has  never,  even  in  the  past, 
fully  felt  the  want  which  makes  him  value  the  goods  he  daily 
uses ! How  many  rich  people  know  only  from  hearsay  what 
real  hunger  is ! 

Hence  it  is  obvious  that,  however  deceitful  and  unsafe  this 
■gift  of  antir.ipation  mpy  bo  and  however  far  astray  it  may  lead 
us  in  individual  cases,  we  still  have  every  cause  to  be  heartily 
thankfiil  thet  we  hRve  it  Otherwise,  neither  actually  feeling 
the  future  wants,  nor  yet  forewarned  of  them  by  anticipation, 
we  could  not,  of  course,  provide  for  them  in  advance ; once 
want  had  made  itself  felt,  any  measures  we  could  take  would 
be  miserably  inadequate  to  provide  for  it;  and,  poorer  than  the 
poorest  savages,  we  should  drag  but  a hazardous  hand-to-mouth 
existence. 

But  economical  action  means  something  more  than  thinking 
generally  about  the  wants  which  are  to  be  provided  for.  As, 
indeed,  all  economising  arises  from  the  quantitative  insufficiency 


■242  PRESENT  AND  FUTURE  IN  ECONOMIC  LIFE  book  v 


of  the  means  of  satisfaction  as  compared  with  the  wants  requir- 
ing satisfaction,  so  it  demands  a constant  selection,  a constant 
I /choosing  between  those  wants  which  can  and  shoidrl  bo  pro- 
^ vided  for,  and  those  others  which  cannot  be  provided  for.  The 
selection  naturally  proceeds  on  a comparison  of  the  importance 
and  urgency — or,  as  we  may  say,  the  intensity — of  the  feelings 
of  pleasure  and  pain  which  are  associated  with  individual  wants 
and  their  satisfaction.  Now,  if  it  is  seldom  that,  in  the  moment 
of  an  economical  decision,  we  actually  feel  that  one  want  to 
which  it  refers,  it  is  much  more  seldom  that,  on  the  moment  of 
our  choice,  we  experience,  as  actual  feelings,  all  those  sensations 

of  pleasure  and  pain  between  which  we  have  to  choos_e.  Our 
comparisons  must,  almost  invariably,  be,  partially  and  very 
(_^'Often  completely,  made  on  imaginative  anticipations  which  we 
make  of  future  feelings.  And  this  leads  us  to  a fact  which 
I should  like  to  emphasise:  The  future  feelings  we  imagine 

iare  commensurable.^  They  are  "commensurable  with  present^ 
actually-felt  sensations,  and  they  are  commensurable  with  one 
another,  and  that  too  without  reference  to  whether  they  belong 
to  the  same  or  to  different  levels  of  time.  It  is  as  easy  for 
me  to  choose  between  a pleasure  which  seems  desirable  at  the 
moment  and  another  pleasure  which  I can  obtain  in  eight 
days,  as  between  two  different  pleasures  which  are  both 
obtainable  in  eight  days,  or,  again,  as  between  two  pleasures 
of  which  the  one  is  obtainable  in  eight  days,  the  other  in  eight 
montlis,  or  eight  years. 

The  fact  that  ve  borrow  from  future  sensations  the  motive 
for  our” present  actions,~is  biie  side  of  our  connection  with  the 
future.  Another  side  is  that,  by  our  present  actions,  we  prepare 
goods  or  material  services  ^ for  the  benefit  of  the  future.  If 
we  analyse  the  totality  of  goods  which  constitutes  our  wealth 
we  shall  find  that  by  far  the  greater  part  has  the  character  of 
'^what,  for  want  of  a better  name,  we  may  call  “ future  goods  ” 
{Znkunfisguter).  AU  productive  goods,  without  exception,  are 
destined  altogether  to  the  service  of  the  future.  Durable  con- 
sumption goods  give  off  only  a fraction  of  their  material 
services  in  the  present,  and  all  the  remainder  in  the  future. 
If  a dwelling  - house,  for  instance,  remains  occupied  for  a 
hundred  years,  and  affords  shelter  and  comfort  all  that  time, 

1 Oil  the  conception  of  Mateiial  Services  see  Capital  emd  Interest,  p.  223. 


CHAP.  I FUTURE  FEELINGS  AND  FUTURE  GOODS 


24.3 


only  an  infinitesimal  fraction  of  these  services  is  rendered  to- 
day; a still  very  small  fraction  is  rendered  in  the  present  year  ; 
the  great  hnlk  of  the  service  is  spread  over  remote  future  periods. 
Even  in  the  case  of  those  perishable  goods,  such  as  meat  and 
drink,  wood  and  candles,  which  we  keep  ready  for  immediate 
consumption  in  our  domestic  economy,  only  one  portion  of  their 
nsp.  is  strictly  speaking,  devoted  to  the  service  of  the  moment ; 
the  greater  part  is  carried  over  into  the  future,  although  it  may 
be  the  immediate  future.  As,  among  our  motives,  future  feel- 
ings are  the  dominant  ones,  so,  among  the  goods  we  possess  and 
use,  “ future  goods  ” occupy  the  larger  place. 

And  there  is  yet  another  important  analogy.  As  future\ 
feelings,  whether  they  belong  to  the  near  or  to  the  far  future, 
are  commensurable,  alike  with  one  another  and  with  present 
feelings,  so  are  future  goods  commensurable,  alike  with  onej 
another  and  with  present  goods.  We  can  compare  the  value 
of  a camellia  which  fades  in  an  hour,  with  that  of  a ticket 
for  a next  week’s  concert,  or  with  that  of  a bunch  of  next 
year’s  roses ; or  we  can  give  one  of  these  goods  for  the  other. 
It  makes  no  difference  to  the  matter  whether  the  “ future 
good,”  which  we  compare  or  barter,  is  at  hand  and  ready  for 
delivery  now,  or  whether  it  is  represented  in  bodily  shape  by 
nothing  more  than  the  means  of  production  out  of  which  it 
will  come,  or  whether,  at  the  moment,  it  is  neither  itself  ready 
nor  is  capable  of  being  palpably  represented — is,  that  is  to  say,  a 
“ future  good,”  in  the  narrowest  and  strictest  sense  of  that  word* 
Thus  we  give  present  money  in  exchange,  not  only  for  the 
present  consumption  good  Bread,  but  also  for  the  present 
productive  good  Meal,  in  which  the  future  good,  bread,  lies 
concealed.  But  just  as  easily  can  we  buy  from  a farmer,  for 
money  down,  his  next  year’s  harvest.  Tn  reserved  seats  ” we, 
buv  the  future  services  of  actors  and  singers.  In  buying 
Consols  we  give  our  present  money  for  a series  of  future  pay- 
ments. fufure  goods  and  services  are  to  us — I have  cause  to 
emphasise  this — entirely  familiar  objects  of  economic  dealing. 
just  as  future  feelings  are  entirely  familiar  economic  motives. 
Both  have  their  ultimate  ground  in  the  continuity  of  our 
personal  life.  What  we  shall  experience  in  a week  or  a year 
hence  afiects  us  not  less  than  what  we  experience  to-day,  and 
has,  therefore,  equal  claims  to  be  considered  in  our  economic 


244  PRESENT  AND  FUTURE  IN  ECONOMIC  LIFE  book  v 


arrangements.  Both 


arrangements 


have  for  their  end  om- 


wellbeing. 


hether  this  tjTforptiVplly  similar  claim  of  fntnre  and 


Present  is  always  fnlly  rp.pngm'sp.rl  in  prar.tiea.l  lifs,  is  another 
question  which  will  require  much  consideration. 

Provision  for  the  future  mates  no  inconsiderable  demands 
on  our  intellectual  strength;  makes  some  demands,  even,  on 
y/  our  moral  strength ; and  these  demands  are  not  equally  met 
by  men  at  all  stages  of  civilisation.  The  present,  alwavs  gets 
its  rights.  It  forces  itself  upon  us  through  our  senses.  To 

cry  for  food  ^en  hungry,  occurs  even  to  . a baby.  But  the 
future  we  must  anticipate  and  picture.  Indeed,  to  have  any 
in  the  future,  we  must  form  a double  series  of  antici-_ 
nations.  We  must  he  able  to  form  a mental  picture  of  what 
will  be  the  state  of  our  wants,  needs,  feehngs,  at  any  particular 
■ point  of  time.  And  we  must  be  able  to  form  another  set  of 
amticipations  as  to  the  fatp.  of  those  measures  which  we  take  at 
^the  moment  with  a view  to  the  future.  Our  knowledge  of 
causal  processes  must  enable  us  beforehand  to  form  an  -adequate 
picture  of  the  forms  which  goods  will  take,  of  the  quantity  of 
them,  and  of  the  time  when  they  will  come  to  maturity  as  result 
of  those  productive  or  commercial  activities  which  we  are  now 
commencing.  To  make  this  double  work  of  anticipating  a 
comparatively  remote  future  clear  and  true  to  fact,  is  not 
pqs.sible  to  the  infant,  and  not  much  more  than  possible  to  the 
child  and  the  savage.  Civihsation  of  course  teaches  us  this 
difficult  art  gradually.  But,  even  among  the  most  advanced 
peoples,  the  art  is  still  very  far  from  being  perfect,  and  the 
practical  economic  provision  for  the  future  is  correspondingly 
inadequate.  But,  be  the  degree  of  anticipation  and  provision 
for  the  future  what  it  may,  wherever  it  exists  in  the  most 
general  way — and  that  is  even  among  the  most  barbarous  tribes 
— future  goods  and  future  ser-vices  are  as  much  actual  objects 

of  economical  dealing  as  present  goods.  We  strive  to  get  them; 
we  produce  them ; we  value  them ; we  buy  and  sell  them. 

I say,  we  value  them;  and  this  is  a point  that  must  be 
looked  more  closely  into.  On  what  nrincinles  do  we  estimate 
the  value  of  future  goods  ? The  answer  is : On  the  same 
principles  as  we  estimate  the  value  of  goods  in  general : that 
is,  according  to  the  marginal  utilitv  which  fEeT  will  brilig  us 


CHAP.  I 


THE  ELEMENT  OF  UNCERTAINTY 


245 


in  the  circumstances,  of  Want  and  Provision  for  want.  But 
here, 'naturally,  we  have  not  to  deal  with  the  relations  of  want 
and  provision  that  ohtain  at  thp.  but  with  the  want 

and  provision  of  that  future  period  when  the  goods  in 
question  will  be  at  aur  disposal.  To  the  inhabitants  of  a 
besieged  town,  threatened  with  starvation,  grain  that  was 
promised  for  delivery  a year  after  the  raising  of  the  siege  would 
certainly  not  be  valued  and  paid  according  to  the  standard  of 
tlie  moments  need ; while,  on  the  contrary,  a brewer  who,  in 
January,  concludes  a purchase  for  a hundred  cubic  feet  of  ice 
to  be  delivered  in  July  of  the  coming  summer,  will,  just  as 
certainly,  not  measure  the  value  of  the  ice  according  to  the 
over-supply  that  obtains  at  the  moment  when  the  bargain  is 
concluded,  but  according  to  the  scarcity  which  is  likely  to  come 
with  the  summer.^ 

Very  frequently,  however,  there  enters  into  the  valuation  of 
future  goods  an  element  which  causes  us  to  value  them  a little 
— or  even  a great  deal — under  their  future  marginal  utility. 
but  which — as  I shall  show  presently — has  no  connection  with 
the  phenomenon  of  interest.  This  is  the  element  of  Uncertainty. 
To  us  nothing  future  is  absolutely  certain.  However  closely 
we  may  have  bound  present  and  future  together  in  economical 
connection,  and  however  much  reason  we  may  have  to  expect 
the  future  to  bring  certain  goods  into  existence,  or  put  them 
at  our  disposal,  still  the  actual  fulfilment  of  our  expectations 
is  never,  in  the  strict  sense  of  the  word,  certain,:  it  is  always 
more  or  less  probable.  Of  course,  the  probability  is  often  so 
great  that,  practically,  it  amounts  to  certainty  : as,  for  instance, 
the  expectation  that  pajonent  will  follow  an  acceptance  by  the 
EothschUds.  In  such  cases  we  do  neglect  the  infinitely  small 
amount  that  is  wanting  of  full  certainty,  and  deduct  nothing 
from  the  valuation  we  put  upon  the  acceptance  on  the 
ground  of  uncertainty.  But,  frequently,  the  probability  falls 
considerably  short  of  full  certainty.  The  farmer,  for  iastajice. 
may  have  done  everything  in  his  power  to  obtain  a harvest  by 
ploughing,  manuring,  sowing,  and  so  on : but  the  harvest  may 
be  destroyed,  wholly  or  in  part,  by  hail,  frost,  flooding,  or 
insect  ravages.  Sometimes,  indeed,  the  probability  sinks  to 
the  level  of  a very  faint  possibility,  as,  for  example,  when  a 
' Menger.  Grundsdtze..  p.  124. 


246  PRESENT  AND  EUTURE  IN  ECONOMIC  LIFE  book  v 


man  holds  one  of  a hundred  tickets  in  a lottery  where  there  is 
only  a single  prize. 

Cases  like  these  cause  a certain  amount  of  hesitation  to 
economic  men.  Are  they  to  value  uncertain  future  sums  of 
goods  exactly  as  if  they  were  certain  ? Impossible ! For  then 
V/6very  lottery  ticket  that  carried  the  chance  of  winning  £100 
would  be  valued  at  £100,  and  every  claim,  even  the  most 
doubtful,  at  its  full  nominal  amount ; — a course  which, 
obviously,  would  land  the  men  who  tried  to  do  business  on 
these  lines  in  the  bankruptcy  court  in  the  shortest  possible 
time.  Or  are  the  uncertain  future  sums  of  goods  not  to  have 
any  value  put  upon  them  ? is  no  importance  whatever  to  be 
attached  to  them  with  respect  to  our  wellbeing  ? As  impos- 
sible. and  as  ruinous.!  For  then  no  man  would  give  the  smallest 
price  for  a chance  in  a lottery,  or  even  for  nine  hundi’ed  and 
ninety-nine  chances  out  of  a thousand ; no  one  would  dare  to 
make  the  slightest  sacrifice  to  sow  when  harvest  was  uncertain. 
From  this  dilemma  there  is  only  one  escape : we  must  ascribe 
to  uncertain  future  sums  of  goods  an  importance  as  regards 
our  wellbeing,  but,  at  the  same  time,  wp.  rrmst  takp.  ap.pminf-, 
of  the  uncertainty  of  their  acquisition  according  to  tbp  dpgrpp 
of  that  uncertainty-  But,  practically,  this  cannot  be  done 
otherwise  than  by  transferring  the  gradation  from  where  the 
gradation  exists,  but  cannot  be  expressed — that  is,  from  the 
degree  of  probabihty, — to  where  the  gradation  is  not,  but 
where  alone  it  can  be  expressed — that  is.  the  degree  of  the 
expected  utihty^:  thus  equalising  a greater,  but  less  probable 
nf.ility,  to  a less,  but  more  probable  utihtv.  and  this  again  to  a 
still  less  but  absolutely  certain  utility.  In  a word,  we  reduce 
all  possibihties  of  utility  to  oertainty,  and  restore  the  balance 
by  deducting  from  this  utility  or  value  the  amount  we  must 
add  to  the  probability  of  the  expected  utility  to  raise  it  to 
certainty.  Thus  we  reckon  a claim  on  the  Eothschilds  at  its 
full  nominal  value  (disregarding  for  the  moment  the  discount, 
as  belonging  to  an  entirely  different  sphere  of  phenomena), 
vEile  one  lottery  ticket  of  a thousand,  where  the  chance  is  a 
prize  of  £100,  we  value  perhaps  at  2s.,  one  of  a hundred  at 
20s.,  and  one  of  ten,  perhaps,  at  £10. 

Strictly  looked  at.  this  kind,  of  valuation — except  where 
the  certainty  of  the  anticipated  future  utility  is  practically 


CHAP.  I 


UNCERTAINTY  NO  ELEMENT  IN  INTEREST  247 


assured — is  always  iiieorrect.,  For,  to  recur  to  our  illustration. 
the  ticket  will  either  draw  the  prize  or  it  will  draw  a blank.  In 
the  former  case  it  will  have  been,  as  the  events  show,  worth  a 
hundred  pounds ; in  the  latter,  worth  nothing  at  all.  In  no 
case  will  it  have  been  worth  2s.,  or  20s.,  or  £10.  But,  how- 
ever false  this  method  of  valuation  is  in  the  indiAudual  case, 
it  comes  at  least  approximately  right,  according  to  the  law  of  / 
averages,  over  a great  many  cases ; and,  in  the  absence  of  anyt/ 
better  method  of  valuation — which  is  denied  us  by  the  dulness 
of  our  imaginative  forethought — it  is  well  justified  as  a 
practical  make-shift.^ 

I repeat  that,  the  element  of  uncertainty,  which  is  the 
cause  of  a lesser  value  being  put  upon  particular  classes  of 
future  goods,  has  no  causal  connection  with  the  phenomenon  , 
qfintergsL  The  lesser  valuation  which  is  its  effect  is  a special  ^ 
one,  and  extends  to  one  class  of  future  goods  only,®  and  there 
it  bears  the  character  of  a deduction  as  premium  for  risk. 

With  the  exception  of  this  peculiarity,  the  valuation  of 
present  and  future  goods  is  made  on  identical  principles.  But, 
to  conclude  from  this  that  the  amnu7U  of  value  of  present  and 
future  goods  must  he  identical,  would  he  ton  hasty.  On  the 
contrary,  since  present  goods  are  available  at  a different  time 
from  future  ones,  and  therefore  come  under  different  actual 
circumstances,  and  are  intended  for  the  service  of  a different 
set  of  wants,  it  is  to  be  argued,  from  all  we  know  about  value, 
that  the  value  of  such  goods  must,  as  a rule,  be  diff'erent.J 
And  so  it  is  in  fact.  We  arrive  thus  at  a proposition  which 
is  a fundamental  one  in  our  inquiry : As  a^^^e  present  goods 

^ This  proposition  has  lately  been  disputed  by  Mataja  {Das  EecJil  des  Schadcner- 
satzes  vom  SfandpuTikte  der  NcUiorialdkoTumie,  Leipsic,  1888,  p.  149,  note  1) 
on  the  ground  that,  in  the  selling  of  such  goods,  one  might  actually  obtain  their 
average  return  as  price,  and  therefore,  quite  correctly,  value  them  according 
to  this.  But  Mataja  forgets  that  the  market  price  is  not  the  cause,  but  is  itself 
the  result  of  the  fact  that  the  individuals,  who  appear  as  buyers  and  sellers  of 
such  goods,  value  them  in  tlie  Arst  instance — that  is,  in  the  individual  case,  object- 
ively falsely — according  to  the  average  return. 

^ See  my  former  tract  on  Rechte  wnd  Verhdltnisse,  p.  85,  where  I brought 
out  the  same  idea  in  a somewhat  different  connection  : also  Mataja,  ihid.  p. 
139. 

^ It  embraces  also  goods  which,  materially,  are  present,  but  are  intended  for 
future  consumption  ; for  instance,  productive  goods,  the  technical  transfor- 
mation of  which  into  consumption  goods  is  accompanied  by  a danger  of  not 
succeeding. 


248  PRESENT  AND  FUTURE  IN  ECONOMIC  LIFE  book  v 


have  a higher  subjective  value  than  future  goods  of  like  kind 

and  number.  And  since  the  resultant  of  subjective  valuations 
determines  objective  exchange  value,  present  goods,  as  a rule, 
have  a higher  exchange  value  and  price  than  future  goods  of 
like  kind  and  number. 

Tliis  phenomenon  is  the  result  of  the  co-operation  of  a. 
number  of  causgs ; — causes  which,  individually,  are  of  very 
different  natures,  but  which,  as  it  happens,  work  in  the  same 
direction.  These  causes  we  shall  consider  in  order. 


CHAPTER  II 


DIFFERENCES  IN_WANT  AND  PRQYISIQN  FOR  WANT 

The  first  great  cause  of  diffftrftncfi  in  vain  ft  between  present 
and  future  goods  consists  in  the  different  circumstances  of 
want  and  provision  {Bednrf  v.vd  fiprkvm.^)  in  present  and 
future.  Present  goods,  as  we  knovr,  receive  their  value  from^ 
the  circumstances  of  want  and  provision  in  the  present : future 
goods  from  the  same  circumstances  in  those  future  periods  of 
time  when  they  will  come  into  our  disposal.  If  a person  is 
badly  in  want  of  certain  goods,  or  of  goods  in  general,  while 
he  has  reason  to  hope  that,  at  a future  period,  he  will  be 
better  off,  he  will  always  value  a given  quantity  of  immediately 
available  goods  at  a higher  figure  than  the  same  quantity  of 
future  goods  In  economic  life  this  occui’s  very  frequently, 
and  may  be  considered  as  typical  in  the  two  following  cases. 
Fir.g.t.  in  all  pagpg  nf  immediate  distress  and  nep.e.s.qity.  A 

peasant  who  has  had  a bad  harvest,  or  sustained  loss  by  fire, 
an  artisan  who  has  had  heavy  expenses  through  illness  or 
death  in  his  family,  a labourer  who  is  starving;  all  these 
agree  in  valuing  the  present  shilling,  which  lifts  them  out  of 
direst  need,  ever  so  much  more  than  the  future  shilling, — 
the  proof  being,  the  usuripjas  conditions  to  which  such  people 
often  submit  in  order  to  raise  money  at  the  moment.^ 
Seoond,  in  the  case  of  persons  who  hnve  reason  to  look 

forward  to  economical  circumstances  of  increasing  comfort. 

Thus  all  kinds  of  beginners  who  have  no  means,  such  as  young 
artists,  lawyers,  officials,  budding  doctors,  men  going  into  busi- 
ness, are  only  too  ready,  in  return  for  a sum  of  present  goods 

^ The  proverb  his  dai  qui  cito  dot  has  therefore  a quite  sound  economical 
basis. 


250 


DIFFERENCES  IN  WANT  AND  PROVISION  book  v 


which  assists  them  to  start  in  the  vocation  they  have  chosen,  and 
acts  as  foundation  of  their  economical  existence,  to  promise  a 
considerably  larger  sum  on  the  condition  that  they  do  not 
require  to  pay  it  until  they  are  in  receipt  of  a decent  income.^ 
Of  course  the  contrary  also  occurs  not  unfreouently  in 

economical  life.  There  are  persons  who  are  compai-atively 
weU  off  at  the  moment,  and  who  are  likely  to  be  worse  off  in 
the  future.  To  this  category  belongs,  among  others,  that  very 
considerable  number  of  people  whose  income  is  obtained,  mostly 
or  altogether,  by  personal  exertions,  and  will,  presumably,  fall 
away  at  a later  period  of  life  when  they  become  unfit  for 
work.  A merchant’s  clerk,  for  instance,  who  is  in  his  fiftieth 
year,  and  has  an  income  of  £100,  cannot  expect  to  have  any- 
thing better  ten  years  later  than,  perhaps,  a small  retiring 
allowance  of  £30,  or  an  annuity  which  he  may  secure  by 
purchase  at  an  assurance  office.  It  is  evident  that  to  such 
people  the  marginal  utility  that  depends  oir  a shilling  spent 
now  is  smaller  than  that  depending  on  a shilling  available 
in  the  more  badly  secured  future.  It  would  seem  that,  in 
such  cases,  a present  shilling  should  be  less  valued  than 
a future  one.  And  so  it  would  be  if  present  goods  were 
necessarily  spent  in  the  present,  but  that  is  not  the  case. 
Most  goods,  and  among  them,  particularly,  money,  which 
represents  all  kinds  of  goods  indifferently,  are  durable..  an(j. 
can,  therefore,  be  reserved  for  the  service  of  the  future.  The 
case,  then,  between  present  and  future  goods  stands  thus. 

^ The  only  possible  uses  of  future  goods  are,  naturally,  future, 
\ while  present  goods  have  the  same  possibility  , of  future  „use, 
\ and  have  besides — according  to  choice — either  the  present  useg, 
or  those  future  ones  which  may  turn  up  in  the  time  that 
intervenes  between  tlie  present  moment  and  -the  future  point 
of  time  with  which  the  comparison  is  being  made. 

Heiy  then  are  two  possibilities.  Ei^er  it  is  the  case 
that  all  those  uses  of  the  present  and  near  future,  which  are 
generally  taken  into  consideration  as  regards  the  good  in 

' For  this  reason  the  well-known  postponement  of  university  fees  in  the 
case  of  poor  students  in  Germany  (Stuiidung)  is  found  to  be  a relief  not  much 
inferior  to  the  total  exemption  of  the  same  class  in  Austria  {Befrnung).  Or 
we  may  think  of  the  conditions  of  the  contract  which  the  impresario  makes 
with  the  singers  he  educates  and  brings  out. 


CHAP.  II  SUPERIORITY  OF  THE  PRESENT  SHILLING  251 


question,  are  less  important  than  the  future  uses ; and  in  this 
case  the  present  good  will  he  reserved  for  these  future  uses, 
will  derive  its  valrrhTfom  them,^  and  wull  be  just  equal  in 
value  to  a future  good  similarly  available.  Or  it  is  the  case 
that  one  of  the  earlier  uses  is  more  important : and  then  the 
present  good  gets  its  value  from  this  use,  and  has,  therefore, 
the  advantage  over  the  future  good,  wliich  can  only  obtain  its 
value  from  a less  important  future  employment.  But,  usually, 
one  never  knows  that  some  unforeseen  occurrence  in  the  near 
future  may  not  give  rise  to  some  more  urgent  want.  At  any 
rate  such  a thing  is  possible,  and  it  gives  a chance  of  profit-,  /' 
able  employment  to  a good  already  on  hand,  such  as,  naturally,!/ 
a good  that  will  only  come  into  our  possession  in  the  future  has 
not  got : — a chance  which,  as  we  have  seen,  is  calculated  in 
the  amount  of  the  value,  and  assessed,  according  to  practical 
although  incorrect  methods,  as  an  increment  graduated  according 
to  its  probability.  To  put  it  in  figures.  With  £100  which 
will  come  info  my  hands  at  the  end  of  five  years,  I can  only 
aim  at  a marginal  utility  determined  by  the  situation  of  things 
in  the  year  1896  ; we  shall  put  this  utility  down  at  1000 
ideal  units.  With  £100  at  my  disposal  now,  I can,  at  the 
hast,  realise  the  same  marginal  utility  of  1000  units,  but  if  an 
urgent  want,  arising  m the  meantime,  gives  me  an  opportunity 
of  obtaining  a marginal  utility  of  1200,1  may,  possibly,  realise 
it.  Say,  now,  that  the  probability  of  such  an  opportunity 
occurring  equals  one-tenth,  I shall  estimate  the  value  of  the 
present  £100  at  1000  units  certain  and,  beyond  that,  at  one- 
tenth  of  the  possible  surplus  of  200  : that  is,  in  aU,  at 
1020  units.‘‘‘  Present  goods  are,  therefore,  in  the  worst  case.  \ 
equal  in  value  to  future  goods,  and,  as  a rule,  they  have  the  \ 

advantflgp  nv^r  them  in  being  employed  as  a reserve.  The 
only  exception  occurs  in  those  comparatively  rare  cases  where 
it  is  difficult  or  impracticable  to  keep  the  present  goods  till 
the  time  of  worse  provision  comes.  This  happens,  for  instance, 
in  the  case  of  goods  subject  to  ra^jid  deterioration  or  decay. 

^ According  to  the  law  laid  do^ni  above  on  p.  162,  for  the  case  of  alternative. 

employments  witii  different  marginal  utilities. 

- I need  scarcely  say  that,  in  practical  life,  we  seldom  or  never  make  out  our 
valuations  with  such  minute  exactitude  as  in  the  above  Dlustration.  But  it 
does  give  a faithful  picture  of  the  hind  of  considerations  of  which  we  avail 
ourselves  in  such  cases. 


252 


DIFFERENCES  IN  WANT  AND  PROVISION  book  v 


such  as  ice,  fruit,  and  the  like.  Any  fruit  merchant  in  harvest 
time  will  put  a considerably  higher  value  on  a bushel  of  grapes 
to  be  delivered  in  April  than  on  a bushel  of  grapes  in  his 
store  at  the  time.  Or  say  that  a rich  man  is  anticipating  a 
long  period  of  arrest,  during  which  his  hving  will  be  conformed 
to  the  hard  fare  of  prison  regime,  how  willingly  would  he  give 
the  price  of  a hundred  present  luxurious  meals  if  he  could 
ensure  ten  such  meals  during  liis  captivity ! 

We  may,  then,  draw  up  the  balance-sheet  which  shows 
the  influence  of  the  different  circumstances  of  Want  and  its 
Provision  in  present  and  future  as  follows.  A great  many 
persons  who  are-not  so  well  provided  for  in  the  present  as 
they  expect  to  be  in  the  future,  set  a considerably  Tn'gbp.r  vainp. 

V'on  present  goods  than  on  future.  A great  many  persons  who 
are  better  provided  for  in  the  present  than  they  expect  to  be 
^ in  the  future,  but  who  have  the  chance  of  preserving  present 
goods  for  the  service  of  the  future,  and,  moreover,  of  using 
them  as  a reserve  fund  for  anything  that  may  turn  up  in  the 
meantime,  vahie-present  goods  either  at  the  same  figure  as 
fatnrp  nr  q,  little  higher.  It  is  only  in  a fractional  minority 
of  cases,  where  communication  between  present  and  future  is 
hindered  or  threatened  by  peculiar  circumstances,  that  present 
V goods  have,  for  their  owners,  a lower  subjective  use  value 
than  future.  This  being  the  state  of  things,  even  if  there  was 
nothing  else  co-operating  with  this  difference  of  want  and 
provision  in  present  and  future,  the  resultant  of  the  subjective 
valuations,  which  determines  the  objective  exchange  value, 
would  obviously  be  such  that  present  goods  must  maintain  a 
]woportionate  advantage,  a proportionate  agio  over  future. 
But,  besides  this,  there  are  other  co-operating  circumstances 
which  work,  even  more  distinctly,  in  the  same  direction. 


CHAPTER  III 


TJNDERESTIMATE  OE  THE  FUTURE 

It  is  one  of  the  most  pregnant  facts  of  experience  that  we  attach 
a less  importance  to  fntnre  pleasures  and  pains  simply  lipp.ansp. 
they  are  future,  and  in  the  measure  that  they  are  future.  Thus 
it  is  that,  to  goods  which  are  destined  to  meet  the  wants  of  the 
future,  we  ascribe  a value  which  is  really  less  than  the  true  in- 
tensity of  their  future  marginal  utility.  We  systematically  under- 
estimate future  wants,  and  the  goods  which  are  to  satisfy  them. 

Of  the  fact  itsetf  there  can  he  no  doubt ; hut,  of  course,  in 
particular  nations,  at  various  stages  of  life,  in  different  in- 
dividuals, the  phenomenon  makes  its  appearance  in  very  vary- 
ing degree.  We  find  it  most  frankly  expressed  in  children 
and  savages..  With  them  the  slightest  enjoyment,  if  only  it 
can  be  seized  at  the  moment,  outweighs  the  greatest  and  most 
lasting  advantage.  How  many  an  Indian  tribe,  with  careless 
greed,  has  sold  the  land  of  its  fathers,  the  source  of  its  main- 
tenance, to  the  pale  faces  for  a couple  of  casks  of  “ firewater  ” ! 
Unfortunately  very,  much  the  same  may  be  seen  in  our  own 
highly  civilised  countries.  The  working  man  who  drinks  on 
Sunday  the  week’s  wage  he  gets  on  Saturday,  and  starves  along 
with  wife  and  child  the  next  six  days,  is  not  far  removed  from 
the  Indian.  But,  to  a smaller  extent,  and  in  more  refined 
form,  the  same  phenomenon  is,  I venture  to  assert,  not  quite 
unknown  to  any  of  us,  however  prudent,  or  cultured,  or  highly 
principled.  Which  of  us  has  not  been  surprised  to  find  that, 
under  the  pressure  of  momentary  appetite,  he  was  not  able  to 
refuse  some  favourite  dish  or  cigar  which  the  doctor  had 
forbidden — knowing  perfectly  that  he  was  doing  an  injury 
to  his  health,  which,  calm  consideration  would  tell  him,  was 


254 


UNDERESTIMATE  OF  THE  FUTURE 


BOOK  V 


much  more  considerable  than  the  pleasure  of  that  trifling 
indulgence  ? Or,  which  of  us  has  not,  to  avoid  a little 
momentary  embarrassment  or  annoyance,  plunged  headlong  into 
a much  greater  ? Who  is  there  that  has  never  postponed  some 
troublesome  hut  unavoidable  call,  or  business,  or  work  wluch 

had  to  be  done  within  a certain  time.  tiU  the  day  was  past 
when  it  could  be  done  with  Little  trouble,  and  has  had  to  do  it 
in  more  difficult  circumstances,  in  haste  and  hurry,  with  over- 
exertion and  ill-humour,  to  the  displeasure  of  those  who  were 
injured  or  wounded  by  the  delay  ? Any  one  who  knows  himself, 
and  keeps  his  eyes  open  to  what  is  going  on  around  him,  will 
And  this  fact  of  the  underestimate  of  future  pleasures  and 
pains  exhibited  under  a thousand  forms  in  the  midst  of  our 
civilised  society. 

Of  the  fact,  then,  there  is  no  doubt.  'VYhy  it  should  be  so 
is  more  difficult  to  say.  The  entire  psychological  relations, 
indeed,  through  which  future  feehngs  in  general  act  on  our 
judgments  and  our  actions,  are  still  very  obscure,  and  it  will 
be  understood  that  the  same  obscurity  covers  the  reasons  why 
future  feelings  act  with  greater  weakness  on  our  judgments 
and  actions  than  present  feelings.  Without  meaning  to  fore- 
stall the  pronouncement  of  the  psychologists,  who  seem  to  me 
more  competent  to  decide  on  both  questions  than  the  economists, 
I venture  to  think  that  this  phenomenon  rests,  not  on  one  ground, 
but  on  the  joint  action  of  no  less  than  three  different  grounds. 

The  first  ground  seems  to  me  to  he  the  incompleteness  of 
the  imaginations  we  form  to  ourselves  of  our  future  wants, 
Whether  it  be  that  our  power  of  representation  and  abstraction 
is  not  strong  enough,  or  whether  it  be  that  we  will  not  take 
the  necessary  trouble,  the  consideration  we  give  our  future  and, 
particularly,  our  far-away  future  wants,  is  more  or  less  im- 
perfect. Naturally,  then,  all  those  wants  which  we  have  not 
considered  remain  without  influence  on  the  valuation  of  such 
goods  as  are  destined  to  serve  those  future  wants,  and,  conse- 
quently, the  marginal  utility  of  such  goods  is  put  too  low. 

While  this  first  ground  is  very  much  a peculiar  defect  in 
estimate,  the  second  seems  to  me  to  rest  on  a defect  in 
will.  I believe  it  frequently  occurs  that  a man,  called  on  to 
make  choice  between  a present  and  a future  pleasure  or  pain, 
decides  for  the  present  pleasure  altliougli  he  knows  perfectly. 


CHAP.  HI 


THREE  GROUNDS  EOR  THIS 


255 


and  is  even  conscious  while  choosing,  that  his-fature  loss  will 
outweioh  his  present  ^aiiu  and  that,  taking  his  welfare  as  a 
whole,  the  choice  is  unprofitable.  How  well  many  a “good 
fellow  ” knows  the  painful  embarrassments  and  privations  he  is 
bringing  on  himself,  by  running  through  his  salary  on  the  day 
he  gets  it,  and  yet  has  not  the  strength  to  resist  the  temptation 
of  the  moment ! Or,  how  often  does  a man,  “ from  weakness,” 
let  himself  be  hurried  into  taking  some  step,  or  making  some 
promise,  which  he  knows  at  the  moment  he  will  rue  before 
twenty -four  hoiirs  are  over ! The  cause  of  such  defects  in 
conduct,  I say,  appears  to  me,  in  distinction  from  the  former 
case,  to  rest,  not  on  want  of  knowledge,  but  on  defect  of  will. 

I should  not  be  surprised,  however,  if  the  psychologists  were 
to  explain  this  case  also  as  only  a variation  of  the  former : it 
may  be  that  the  weaker  feeling  of  the  moment  prevails  over 
the  stronger  feeling  of  the  future  only  because  the  latter,  while 
present  in  consciousness  in  a general  way,  is  not  lively  enough 
and  strong  enough  to  take  possession  of  the  mind.  Tor  our 
purpose,  however,  it  is  a matter  of  no  consequence. 

Finally,  as  third  groimd,  I am  inclined  to  name  tlie  consider- 
ation of  tlie  shortness  and  uncertainty  of  life.  In  the  case 
of  future  goods,  their  ohjective  acquisition  may  be  practically 
certain,^  and  yet  it  is  possible  that  we  may  not  live  to  acquire 
them.  This  makes  their  utility  a matter  of  uncertainty  for  us. 
and  causes  us — in  perfect  analogy  with  the  case  of  objectively 
uncertain  goods — to  make  a deduction  from  their  value  corre- 
sponding to  the  degree  of  uncertainty.^  A utility  of  100,  as 
to  which  there  is  50%  of  probability  that  we  shall  not  live  to 
see  it,  we  certainly  do  not  value  so  highly  as  a present  utility 
of  100;  probably  we  value  it  as  we  do  a present  utility  of  5 0 ; 
and  I am  convinced  that  any  of  us  who  was  promised,  to-day, 
a cheque  for  £10,000  on  his  hundredth  birthday,  would  be 
glad  to  exchange  this  large,  but  somewhat  uncertain  gift,  for  a, 
very  small  sum  in  present  money  ! To  determine  correctly  the 
practical  inflnence  of  this  factor,  howeyer,  we  must  make  a 

^ See  above,  p.  245. 

- If  there  is  objective  uncertainty  as  well  as  subjective  there  will,  paturally, 

be  t^vo  deductions.  Of  these  the  one  made  on  account  of  objective  uncertainty, 

as  a particular  phenomenon  of  certain  kinds  of  goods,  has  nothing  to  do  with 
interest ; we  have  only  to  deal  with  the  deduction  on  account  of  .subjective 
unr.PTt.aint,y. 


256 


UNDERESTIMATE  OF  THE  FUTURE 


BOOK  V 


somewhat  more  accurate  calculation,  both  of  the  extent  to 
which  it  prevails,  and  the  way  in  which  it  works. 

As  regards  this  I think  we  shall  be  able  to  establish  what 
follows.  The  factor  in  question  is  directly  active  only  in  a 
minority  of  cases : in  most  cases  its  action  is  indirect.  It 

works  in  the  most  direct  and  powerful  way  in  those  not  very 
numerous  cases  where  men  have  the  thought  of  death  forced 
on  them  by  peculiar  circumstances ; for  example,  among  very 
old  men,  people  sufiering  from  fatal  diseases,  those  placed  in 
^ dangerous  situations  or  engaged  in  very  perilous  callings,  such  as 
people  in  times  of  plague  or  soldiers  before  an  engagement,  and 
so  on.  The  disregard  of  a future  so  uncertain  not  seldom  finds 
drastic  expression  in  the  mad  extravagance  which  seizes  people 
in  such  circumstances : a fact  in  the  history  of  civilisation 
which  has  often  been  noted — by  Adam  Smith  among  others. 
On  the  other  hand,  the  thought  of  the  uncertainty  of  life  seems 
to  me  to  exert  no  direct  influence  at  all  in  that  vast  maioritv 
of  cases  where  we  are  dealing  with  men  in  normal  circum- 
stances, and  dealing,  at  the  same  time,  with  the  valuation  of 
goods  belonging  to  a time  not  very  far  in  the  future ; say, 
goods  that  would  come  into  their  possession  in  a couple  of  days, 
or  months,  or  even  years.  I am  convinced  that  a healthy 
middle-aged  man,  to  whom  a payment  of  £100  next  year  was 
due  for  certain,  would  not  value  it  a single  penny  less  on  the 
ground  that  he  might  not  live  to  see  next  year.  Tt  is  only 
where  very  long  periods  of  time  are  concerned  thfiit 
among  normally  situated  men,  oj2taina__fiilly — and — directly. 
Payments  which  faU  due  in  a hundred,  fifty,  or  even  twenty 
years,  lose  in  value  from  the  consideration  of  the  uncertainty 
of  life  as  regards  all  payees ; payments  which  fall  due  in  ten 
years  lose  in  value  as  regards  a great  many. 

Anri  hftTP  finqlly  wft  have  the  point  from  which  this  third 
motive  may  rjse  to  universal  indirpH  efficiency — although,  at 
j the  same  time,  a very  much  weakened  efficiency.  If  certain  differ- 

ences of  valuation  have  once  become  established  as  regards  long 
intervals  of  time,  they  must,  through  the  agency  of  exchange 
transactions,  to  some  degree  affect  shorter  intervals.  For  the 
mechanism  which  determines  objective  value  abhors  any  sudden 
leap  in  value.  It  is  not  possible,  for  example,  that  a payment 
of  £100  which  will  be  made  on  1st  January  1900  certain, 


CHAP.  HI 


ARBITRAGE 


257 


should  be  worth  only  £80  till  31st  December  1889,  and 
should  jump  up  to  the  full  value  of  £100  at  twelve  o’clock 
that  night,  because  the  due  date  is  now  only  ten  years  off. 
Equalising  tendencies,  and  transactions  which  I can  best  com- 
pare with  stock  exchange  arbitrage,  spread  the  differences  of 
yajne,  wliich  obtain  as  regards  long  periods,  uniformly  over  the 
entire  intermediate  period. — Putting  all  these  peculiar  circum- 
stances together,  I should  be  inclined  to  consider  the  practical 
efficiency  of  this  factor  not  altogether  trifling.  Still  I should 
not  place  it  very  high,  especially  as  it  is  weakened,  to  a not 
inconsiderable  extent,  by  the  consideration  of  closely  related 
heirs.  In  any  case,  the  two  motives  fimt  mentioned  have  con- 
siderably more  to  do  with  the  undervaluation  of  the  future 
utility  than  the  third.^  All  three  causes  of  our  underestimate 
of  future  utility — errors  of  valuation  through  faulty  represent- 
ation of  coming  needs,  defects  of  will,  and  consideration  of 
the  uncertainty  of  life — manifest  themselves  in  extremely  i 
different  degree-ci  in  diffprpnt  inrlivirlnfllq,  and  even  in  the  same ' 
individual  at  different  times,  according  to  differences  of  temper-  j 
ament  and  mood.  For  the  same  interval  of  time  they  may 
cause  one  to  make  an  undervaluation  of  100^,  another  of 
50^,  a third  of  1%  or  2^  ; while  they  may  sena  fanatics 
in  the  matter  of  foresight  and  precaution  to  the  opposite 
extreme  of  overvaluing  future  utility.  I should  like  to  call 
special  attention,  further,  to  the  fact,  that  the  undervaluation 
which  results  from  these  causes  is  not  at  all  graduated  bar-  / 
moniously..  in  the  subjective  valuation  of  the  individuals,  ^ 
according  fo  thp  length  of  the  time  that  intervenes.  I mean, 
it  is  not  graduated  in  this  way,  for  example,  that  the  man  who 
discounts  a utility  which  he  expects  to  get  in  one  year  by 
5%,  must  discount  a utility  due  in  two  years  by  10%,  or  one 
due  in  three  months  by  1^%.  On  the  contrary,  the  original  ^ 
subjective  undervaluatinria  are,  in  the  highest  degree,  unequal 
and  irregular.  In  particular,  so  far  as  the  undervaluation  is 
caused  by  defects  of  will,  there  may  be  a strong  difference 
between  an  enjoyment  which  offers  itself  at  the  very  moment, 
and  one  which  does  not ; while,  on  the  other  hand,  there  may  be 

^ An  effect  analogous  to  that  of  the  uncertainty  of  life  might  be  exerted  by 
the  uncertainty  of  the  duration  of  our  capacity  of  enjoyment ; but  in  any  case 
the  limits  of  the  efficiency  of  this  motive  are  much  mor  closely  drawn. 

S 


258 


UNDERESTIMATE  OF  THE  FUTURE 


BOOK  V 


a very  small  aifference,  or  no  difference  at  all,  between  an 
enjoyment  which  is  pretty  far  away,  and  one  which  is  farther 
away.  Uniformity  is  practically  introduced  into  the  various 
undervaluations^  as  we_shall- see,  later,  only  through  the  media- 
tion of  exchange  business..  At  any  rate — and  this  is  sufficient 
for  us  here — all  three  causes  have  one  common  result ; that, 
under  their  influence,  we  estimate  the  utility  of  future  goods 
at  a lower  figure  than  expresses  their  true  value : we  look  at 
the  mai^iual  utility  of  future  goods  diminished,  as  it  were,  in 
perspective.^ 

Now  it  is  easy  to  show  that  this  phenomenon  must  sub- 
stantially contribute  to  strengthen  the  effinienr.y  nf  the  first 
factor  in  the  undervaluation  of  future  goods,  the  difference  in 

the  provision  of  goods  for  present  and  future.  All  persons  who 
are  worse  off  in  the  present  than  they  expect  to  be  in  the  future, 
— persons  to  whom,  therefore,  the  true  marginal  utility  of  a 
future  good  is  already  less  than  the  marginal  utility  of  a similar 
present  good, — are  led  by  this  second  firctor  to  put  the  future 
marginal  utility  still  lower  than  it  really  is,  and  this  increases 
the  difference  in  value  to  the  further  prejudice  of  future  goods. 
If,  for  example,  the  marginal  utility  of  a definite  present  good 
is  100,  and  the  true  marginal  utility  of  a similar  good 
in  a better -provided  future  is  80,  the  future  good  will  be 
rated,  perhaps,  at  70  only,  thanks  to  this  second  factor,  and 
thus  the  difference  of  valuation  rises  from  20  to  30.  In  the 
same  way  those  persons  who  may  be  supposed  to  be  in 
approximately  similar  circumstances  in  present  and  future,  and 
would,  other  things  being  equal,  value  present  and  future  goods 
at  approximately  the  same  figure,  will  fall  under  the  category 
of  those  who  value  present  goods  more  highly  than  future. 
This  second  factor,  then,  increases  both  the  number  and  the 


^ Jevons,  like  his  I'ollower  Sax,  as  we  saw  in  the  note  to  p.  239,  fell  into  a 
misunderstanding  as  to  the  entire  nature  of  the  phenomenon  mentioned  in  the 
text,  in  confusing  the  representations  and  valuations  which  we  make  as  regards 
future  feelings  with  actuall}'  present  feelings.  We  need  not  wonder,  then,  at 
not  finding  in  these  writers  any  sound  thorough -going  explanation  of  the 
phenomena,  or  even  an  attempt  at  such.  They  accept  the  supposed  “weakened 
anticipated  feelings”  of  future  needs  simply  as  fact,  as  a “well-known  psycho- 
logical fact,”  and  the^  pass  over  much  of  its  detail — which  really  very  much 
requires  explanation  — without  comment  as  “self-evident”  (see,  e.g.,  Sax  as 
before,  p.  178). 


CHAP.  Ill  HOW  IT  AFFECTS  THE  FIRST  FACTOR 


259 


intensity  of  the  differences  in  valuation  to  the  prejudice  of 
future  goods,  and,  naturally,  in  the  market  where  present  goods 
are  exchanged  against  future,  this  must  make  the  resultant 
exchange  value  more  unfavourable  to  the  latter.  The  agio  on 
present  goods  moves  upwards.^ 

1 Indirectly  this  effect  will  be  strengthened  by  the  fact  that,  through  the  under- 
valuation of  the  future  utility,  men  will  refrain  from  providing  for  the  future  so 
amply  as  they  would  otherwise  have  donp..  In  other  words,  this  underestimate 
acts  to  the  prejudice  of  saving  and  accumulation  of  wealth,  and  still  further 
reduces  the  number  of  persons  who  have  to  throw  an  accumulated  surplus  of 
present  goods  on  the  market. 


CHAPTEE  IV 


THE  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS 

There  is  still  a third  reason  why  present  goods  are,  as  a rule, 

worth  more  than  future.  The  fact  on  which  it  is  based  has 
long  been  known  in  a general  way,  but  its  essential  nature 
has  been  thoroughly  misunderstood.  Hidden  in  a perfect 
wilderness  of  mistakes,  economists  ever  since  Say  and  Lauder- 
dale have  been  in  the  habit  of  going  to  it,  under  the  name 
“‘productivity  of  capital,”  for  their  explanation  and  justifica- 
tion of  Interest.^  This  name,  which  has  already  been  the 
cause  of  so  many  errors,  and  which,  besides,  does  not  altogether 
correspond  with  what  it  is  intended  to  convey,  I shall  lay  on 
one  side,  and  shall  confine  myself  to  the  facts  of  the  case  pure 
yand  simple.  These  facts  are  as  follows: — J<hat.  as  a rule. 
present  goods  are,  on  technical  grounds,  preferable  instruments 
for  the  satisfaction  of  human  want,  and  assure  us,  therefore,  a 
Ingher  marginal  utility  than  future  goods. 

^ It  is  an  elementary  fact  of  experience  that  methods  of 
production  which  take  time  are  more  productive.  That  is  to 
say,  given  the  same  quantity  of  productive  instruments,  the 
lengthier  the  productive  method  employed  the  srreater  the, 
quantity  of  products  that  can  be  obtained.  In  previous 
chapters  we  went  very  thoroughly  into  this,  showed  the  reasons 
of  it,  and  illustrated  and  confirmed  it  by  many  examples.^  I 
venture  to  think  we  may  now  assume  it  as  proved.  If, 
then,  we  take  an  amount  of  productive  instruments  avail- 
able at  a certain  point  of  time  as  given,  we  have  to  repre- 
sent the  product  , which  rnay  be  turned  oi<f.  by  ■■increasingly 
lengthy  processes,  under  the  picture  of  a series  increasing  in  a 


^ See  Capital  and  Interest,  p.  111. 


^ See  above,  pp.  18,  84. 


CHAP.  IV  LENGTHY  PROCESSES  MORE  PRODUCTIVE  261 


certain  rat, in  rfif^nlriT  or  irregular.  Suppose  that,  in  the  year 
1888,  we  have  command  of  a definite  quantity  of  productive 
instruments,  say,  thirty  days  of  labour,  we  may,  ir  terms  of  the 
above  proposition,  assume  something  like  the  following.  The 
month’s  labour,  employed  in  methods  that  give  a return 
immediately,  and  are,  therefore,  very  unremunerative,  will 
yield  only  100  units  of  product:  employed  in  a one  year’s 
process,  it  yields  200  units,^  but,  of  course,  yields  them  only 
for  the  year  1889:  employed  in  a two  years’  process  it  yields 
280  units — for  the  year  1890 — and  so  on  in  increasing  pro- 
gression ; say,  350  units  for  1891,  400  for  1892,  440  for 
1893,  470  for  1894,  and  500  for  1895. 

Compare  with  this  what  we  may  get  from  a similar 
quantity  of  productive  instruments,  namely,  a month’s  labour, 
imder  the  condition  that  we  do  not  get  possession  of  the 
labour  till  a year  later  A month’s  labour  wltich  falls  fine  in 
the  year  1889  evidently  ^fields  nothing  for  the  economic  year 

1888.  If  any  result  is  to  be  got  fi’om  it  in  the  year  1889  it 
can  only  be  by  employing  it  in  the  most  unremunerative 
(because  immediate)  production,  and  that  result  will  be,  as 
above,  100  units.  In  1890  it  is  possible  to  have  a return  of 
200  units  by  employing  it  in  a one  year’s  method  of  produc- 
tion; in  1891  to  have  280  units  by  employing  it  in  a two 
years’  process,  and  so  on.  In  exactly  the  same  way,  with 
a month’s  labour  falling  due  two  years  later,  in  1890,  nothing 
can  be  had  to  satisfy  the  wants  of  the  economic  years  1888 
and  1889,  while  100  units  may  be  got  for  1890  by  an 
unremunerative  immediate  process,  200  for  1891,  280  for 
1892,  and  so  on;  If  we  group  together  in  one  table^  the 
result  obtainable  for  the  satisfaction  of  our  wants  from  a 

similar  amount  of  present,  next  year’s,  and  succeeding  years’. 

productive  instruments,  we  get  the  following  scheme : — 

^ Naturally,  in  the  case  of  lengthier  processes,  the  labour  first  eyppnrlefl  rsqnirp;^ 

that  the  prodnction  should  be  continued  by  the  addition  of  nsw  lalimir.  By  the 
figures  giyen  in  the  text  is  always  meant  that  share  in  the  product  which,  of  the 
total  product,  falls  to  the  productive  unit — in  this  case  the  thirty  days’  labour. 
If,  e.g.,  in  the  case  of  a one  year’s  process,  other  eleyen  months  of  labour  follow 
the  one  first  expended,  this  would  inyolve,  in  terms  of  our  illustration,  that  a 
total  product  of  2400  units  was  obtained  in  the  twelve  months  taken  together, 
and  thus,  to  the  one  month,  would  be  ascribed  a product  of  200  units. 


262  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS  I3k.  v 


A MONTH’S  LABOUR  OF  THE  YEAR 


.2 

f 

1888. 

1889. 

1890. 

1891. 

\ 

c 

S 

1888 

100 

— 

— 

— 

o 

p 

1 1889 

200 

100 

— 

— 

o / 

s 

^ 1890 

280 

200 

100 

— 

o 

1891 

350 

280 

200 

100 

1892 

400 

350 

280 

200 

1893 

440 

400 

350 

280 

cc 

1894 

470 

440 

400 

350 

1895 

500 

470 

440 

400 

] 

s 

o 

CL, 


& 


Putting  these  figures  into  words,  the  table  shows  that,  what- 
ever economic  period  we  may  fix  upon,  our  eenununV.  intpT-pgt.<; 
for  that  period  are  more  advanced  by  a lab'^ur  1888 

than  by  a month’s  labour  oUJL8-A9^by  one  of  1889  than  by 
one  of  1890,  and  so  on.  To  meet  the  wants  of  1888,  for 
example,  a month’s  labour  expended  in  the  year  1889  or  1890 
gives  us  nothing,  while  a month’s  labour  expended  in  1888 
places  at  our  command  at  least  100  units  of  product.  To 
meet  the  wants  of  1893  a month  of  1890  gives  us  350  units,  a 
month  of  1889  400  imits,  a month  of  1888  440  units.  What- 
ever period  of  time  we  take  as  our  standpoint  of  comparison, 
the  earlier  (present)  amount  of  productive  instruments  is  seen 
to  be  superior,  technically,  to  the  equally  great  later  (future) 
amoimt? 

^ On  the  same  analogy,  as  a present  month  of  labour  is  technically  superior  to 
a future,  so  is  a past  month  to  a_present.  According  to  our  scheme  a month  of 
the  period  1883,  e.g.,  would  give  for  1888,  in  a 5 years’  process,  440  units,  while 
a month  of  the  year  1888  would  give  only  100  units.  But,  naturally,  the  past 
years  would  realise  their  technical  superiority,  as  against  the  present,  only  under 
the  condition  that  they  also  were  actually  invested  in  correspondingly  lengthy 
aniL  roundabout  processes,  But  this  is  seldom  the  case  as  regards  long  past 
years.  And,  therefore,  one  need  not  be  frightened  at  the  consequences  which, 
of  course,  the  above  theory  involves ; that,  for  instance,  a month’s  labour  of 
the  fifteenth  century  is,  perhaps,  a hundred  times,  and  a month’s  labour  of  the 
year  of  our  Lord,  perhaps,  a thousand  times  more  fruitful  than  a month’s  labo;^ 
of  the  present  ; that,  accordingly,  to  a certain  extent,  the  product!'^ 
powers  of  the  past  were  gigantic  beside  those  of  to-day,  and  to-day’s  pro- 
ductive powers  gigantic  compared  to  those  of  future  centuries — a view  which 
would  seem  to  give  us  but  a dreary  outlook  to  a continuous  degeneracy  of 
our  productive  powers.  Certainly,  if  any  one  in  the  year  1 had  expended 
a month  of  labour  with  a view  to  the  marginal  utility  of  the  year  1888, 


CHAP.  IV  BOTH  AS  REGARDS  AMOUNT  AND  VALUE  263 


But  is  it  superior  also  in  the  of  itis 

and  value  ? Certainly  it  is.  For  if,  in  every  conceivable 
department  of  wants  for  the  supply  of  which  we  may  or  shall 
employ  it,  it  puts  more  means  of  satisfaction  at  our  disposal, 
it  must  have  a gi’eater  importance  for  our  wellbeing.  Of 
course  I am  aware  that  the  greater  amount  need  not  always 
have  the  greater  value : — a bushel  of  corn  in  a year  of  famine 
may  be  worth  more  than  two  bushels  after  a rich  harvest ; a 
silver  shilling  before  the  discovery  of  America  was  worth  more 
than  five  shillings  are  now.  But  for  one  and  the  same  person, 
at  one  and  the  same  point  of  time,  the  greater  amount  has 
always  the  greater  value ; whatever  may  be  the  absolute 
value  of  the  bushel  or  the  shilling,  this  much  is  certain,  that, 
for  me,  two  shillings  or  two  bushels  which  I have  to-day  are 
worth  more  than  one  shilling  or  one  bushel  which  I have 

to-day.  And  in  our  comparison  of  the  value  of  a present 
and  a future  amount  of  productive  instruments  the  case 
is  exactly  similar.  Possibly  the  470  units  of  product 
which  may  be  made  from  a month’s  labour  in  1889  for  the 
year  1895,  are  worth  less  than  the  350  units  which  may  be 
got  from  the  same  for  the  year  1892,  and  the  latter,  notwith- 
standing their  numbers,  may  be  the  most  valuable  product 
which  can  be  made  out  of  a month  of  1889  in  general  In 
any  case  the  400  units  which  a man  can  gain  by  a month’s 
labour  of  the  year  1888  for  the  year  1892  are  still  more 
valuable  anrl  tliPrefnrp.  the  superiority  of  the  earlier  (presenti 

and  had  arranged  for  the  systematic  continuation  of  the  work  during  all  the  1888 
years  intervening,  in  that  case,  thanks  to  the  natural  powers  impressed  into  the 
service  in  the  course  of  such  a roundabout  journey,  the  nrodnct  of  th.at  long  pa.st 
month  would  be  mountains  high  beside  the  product  of  a month  of  the  present 

year.  But,  as  things  are,  trees  do  not  grow  up  till  they  meet  the  sky.  The 
productive  powers  are  too  necessary  for  the  wants  of  the  living,  to  let  us  employ 
them  in  advance  for  the  hehoof  of  future  centuries  or  future  thousands  of  years. 
And  thus  the  year  of  those  future  wants  to  which  we  look  forv’ard  and  work, 
and  by  which  we  get  the  measure  of  the  productiveness  of  the  powers,  moves 
forward  very  much  parallel  with  the  year  when  the  productive  powers  are  exerted. 
It  is  quite  certain  that  our  productive  powers  of  1888  do  for  the  wants,  say,  of 
the  year  1898,  as  much  as  and  more  than  the  productive  powers  of  the  year 
1 A.D.  did  for  the  wants  of  the  year  11  a.p.  And  thus  the  productive  powers  of 
giants  do  not  degenerate  into  those  of  pigmies,  as  a sophistical  dialectic  might 
easily  delude  us  into  believing : in  all  ages,  the  productive  powers,  aeciivdino-  rn 
the  advance  of  technique,  do  as  much  or.  rather.  increasinKlv  mnr^.  fnr  Hip 

of  their  orvn  circle  of  provision. 


264  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS  bk.  v 


amonrit  nf  prorliictive  instrumeijts — here  and  everywhere, 
however  the  illustration  may  be  varied — -remains  confirmed. 

The  truth  of  the  proposition,  that  the  technical  superiority 
of  present  to  future  means  of  production  must  also  be  associated 
with  a superiority  in  value,  may  be  made  ahsohitely  cnnvinc.ino; 
by  mathematical  evidence  if  the  tabular  comparison,  which  we 
have  drawn  out  to  show  the  technical  productiveness  of 
different  years  of  productive  instruments,  be  extended  to  the 
marginal  utility  and  value  of  the  same.  And  since  we  have 
to  deal  here  with  a,  proposition  which  will  form  the  chief  pillar 
in  my  interest  theory,  I prefer  to  err  on  the  side  of  making  it 
too  plain  rather  than  risk  not  making  it  plain  enough,  and  I 
shall  spare  no  pains  to  prove  it  in  the  most  complete  way. 
In  other  respects,  too,  the  trouble  it  costs  us  will  not  be 
altogether  lost : as  we  proceed  we  shall  get  an  occasional 
glimpse  into  certain  relations  which  are  seldom  or  never  taken 
thought  of,  and  yet,  none  the  less,  have  some  importance 
towards  giving  us  a complete  and  thorough  grasp  of  the  whole. 

The  marginal  utility  and  value  of  means  of  production 
depend,  as  we  knowd  on  the  anticipated  marginal  utility  and 
value  of  their  product.  But  the  means  of  production  of  which 
we  have  been  speaking,  the  month’s  labour,  may  be  invested  in  a 
production  that  yields  an  immediate  return,  or  in  a one,  two, 
three,  or  ten  years’  period  of  production,  and,  according  as  it 
is  so  invested,  we  may  obtain  the  very:  _difffiieiit_pxad-Ujct--Qff_ 
100.  200.  280.  350  units,  and  so  on.  Which  of  these 
products  is  to  be  our  standard  ? The  foregoing  chapters  have 
already  given  us  the  answer.  In  the  case  of  goods  which  may 
be  employed  in  different  ways  yielding  different  marginal 
utilities,  it  is  the  highest  marginal  utility  tha,t  is„ the, .standard. 
Therefore,  in  our  present  case,  it  is  that  product  which  pro- 
duces the  greatest  amount  of  value.^  But  this  need  not 

^ See  above,  p.  179. 

- See  above,  p.  163.  To  prevent  a mistake  which  is  very  apt  to  arise 
through  the  similarity  of  the  words,  I again  emphasise  here  that  the  proposi- 
tion in  the  text  is  not  in  contradiction  with  the  fundamental  proposition  on 
p.  186,  that,  for  productive  yoods.  the  value  of  the  least  valuable  of  their 
P^rofWtg,  tbo  ^liie  nf  the  “marginal  product.”  is  the  standard.  The  marginal 
product,  that  is  to  say,  is  the  last  of  several  products  which  may  all  be  made 
from  the  available  means  of  production  ; but,  in  the  case  we  are  now  considering. 


CHAP.  IV 


INVESTED  IN  VARIOUS  PERIODS 


265 


coincide  with  the  largest  product,  the  product  which  contains 
the  greatest  nnmi-icr  of  iTnit.s ; on  the  contrary,  it  seldom  or 
never  coincides  with  that.  We  should  obtain  the  greatest 
number  of  units  by  an  infinitely  long  production  process,  or  a 
process  lasting  a hundred  or  two  hundred  years.  But  goods 
which  first  come  into  possession  in  the  lifetime  of  our  grand- 
children or  great-grandchildren,  have,  in  our  valuation  of  to-day, 
little  or  no  value. 

In  determining  which,  of  various  possible  products,  has  the 
highest  value  for  us,  we  are  guided  by  the  two  con  .si  derations 
of  which  we  have  just  spoken.  First,  we  are  guided  by  the 
anticipated  position  of  our  provision  at  the  various  periods  of 

time.  If,  for  instance,  a man  is  ill  provided  for  in  the  present, 
or  not  provided  for  at  all,  the  unit  of  product  in  the  present 
may,  on  that  very  account,  have  so  high  a marginal  utility  and 
value,  that  the  sum  of  value  of  1 0 0 present  units  of  product  is 
greater  to  him  than  that  of  500  units  which  he  might  have  at 
his  command  in  1895.  To  another  man,  again,  whose  present 
is  as  well  provided  for,  or  nearly  as  well  provided  for,  as  his 
future,  the  advantage  in  numbers  may  give  an  advantage  in 
value  to  the  500  units.  The  second  consideration  by  which 
we  are  guided  is,  that  our  present  valuation  of  a future  good 
or  product  does  not  depend  on  its  true  marginal  utility,  but'’ 
on  our  suhiective  estimation  of  the  marginal  utility.  But,  in 
forming  this  subjective  estimate,  there  takes  place,  as  we  have 
already  seen,  a kmd  of  perspective  diminution ; a diminution 
which  is  in  direct  ratio  with  the  futurity  of  the  time  to  which 
the  good  in  question  belongs.  The  amount  of  which  we  are 
in  search,  therefore,  the  greatest  sum  of  value,  will  evidently 
belong  to  that  one,  among  the  various  possible  products  the 
number  of  whose  items,  multiplip^  >^y  value  of  tbe  unit  of 

product  (as  that  value  shows  itself  with  regard  to  the  relation 
of  want  and  provision  for  want  in  the  particular  economic  period, 
and  with  regard  to  the  diminution  which  future  goods  undergo 
from  perspective),  gives  the  greatest  amount  of  value. 

We  shall  put  our  illustration  in  figures  chosen  at  random. 
I wish  to  emphasise  that  the  figures  can  be  chosen  quite  at 

it  is  not  a matter  of  employing  a month’s  labour  in  one  aTid  more  years’  pro- 

dnctioD,  but  in  one  or  more  years’  prodnction.  And  of  these  alternative  emplov- 

ments,  naturally,  the  most  important  has  the  preference. 


266  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS  bk.  v 


random  and  varied  by  the  reader  at  will,  for  our  proposition 
maintains  its  validity  in  every  conceivable  position  of  subjective 
valuations.  Moreover  I intentionally  take  figures  varying 
very  greatly  and  irregularly,  it  being  obvious  enough,  without 
any  special  demonstration,  that,  if  the  value  of  the  unit  of 
goods  were  not  to  vary  for  the  different  periods,  or  not  to  vary 
much,  the  present  means  of  production,  as  giving  a greater 
quantity  of  products,  would  inevitably  give  us  also  a greater 
sum  of  value.  Assume,  then,  quite  at  random,  that,  for  a 
certain  individual,  the  true  marginal  utility  and  value  of  the 

unit  of  product — ^taking  into  account  his  special  circumstances 
of  provision,  which  we  shall  suppose  are,  on  the  whole,  gradu- 
ally improving — are  as  follows : in  1888,  5 units,  of  value 
(pounds,  shillings,  or  units  of  any  ideal  standard);  in  1889,  4 ; 
in  1890,  3'3  ; in  1891,  2‘5 ; in  1892,  2'2  ; in  18^3,  2'1  ; in 
1894,  2 ; and  in  1895,  1’5.  This  true  marginal  utility,  then, 
by  reason  of  perspective,  experiences,  for  the  later  periods, 
an  irregularly  progressive  reduction  of  this  kind:  for  1888 
it  is,  subjectively  estimated,  5 (without  reduction) ; for  1889, 
instead  of  4,  it  is  3'8  ; for  1890,  instead  of  3‘3,  it  is  only  3 ; 
for  1891,  2-2;  for  1892,  2;  for  1893,  1-8;  for  1894,  1-5; 
and  for  1895,  1.  If,  now,  on  the  basis  of  these  figures^we 
calculate  the  sums  of  value  represented  by  the  difierent  possible- 
products  of  a month’s  labour  falling  due  in  the  various  years, 
from  1888  to  1891.  we  get  the  following  tables : — 


A MONTH’S  LABOUR  AVAILABLE  IN  1888  YIELDS 


For  the  Economic 
Period. 

Units  of 
Product. 

True  Marginal 
Utility  of  Unit. 

Marginal 
Utility  reduced 
in  Perspective. 

Amount  of 
Value  of  Entire 
Product. 

1888 

100 

5 

5 

500 

1889 

200 

4 

3-8 

760 

1890 

280 

3-3 

3 

840 

1891 

350 

2-5  . 

2-2 

770 

1892 

400 

2-2 

2 

800 

1893 

440 

2-1 

1-8 

792 

1894 

470 

2 

1-5 

705 

1895 

500 

1-5 

1 

500 

CHAP.  IV 


INVESTED  IN  VARIOUS  PERIODS 


267 


A MONTH’S  LABOUR  AVAILABLE  IN  18S9  YIELDS 


For  Economic 
PerioA 

Units. 

True  Marginal 
Utility. 

Reduced  Mar- 
ginal Utility. 

Value. 

1888 

5 

5 

1889 

100 

4 

3-8 

380 

1890 

200 

3-3 

3 

COO 

1891 

280 

2-5 

2-2 

616 

1892 

350 

2-2 

2 

700 

1893 

400 

2-1 

1-8 

720 

1894 

440 

2 

1-5 

660 

1895 

470 

1-5 

1 

470 

A MONTH’S  LABOUR  AVAILABLE  IN  1890 

YIELDS 

For  Economic 
Period. 

Units. 

True  Marginal 
Utility. 

Reduced  Mar- 
ginal Utility. 

Value. 

1888 

5 

5 

1889 

— 

4 

3-8 

— 

1890 

100 

3-3 

3 

300 

1891 

200 

2-5 

2-2 

440 

1892 

280 

2-2 

2 

560 

1893 

350 

2-1 

1-8 

630 

1894 

400 

2 

1-5 

600 

1895 

440 

1-5 

440 

A MONTH’S  LABOUR  AVAILABLE  IN  1891  YIELDS 


For  Economic 
Period. 

Units. 

True  Marginal 
Utility. 

Reduced  Mar- 
ginal Utilit)'. 

Value. 

1888 

5 

5 

1889 

— 

4 

3-8 

— 

1890 

— 

3-3 

3 

— 

1891 

100 

2-5 

2'2 

220 

1892 

200 

2-2 

2 

400 

1893 

280 

2T 

1-8 

504 

1894 

350 

2 

1-5 

525 

1895 

400 

1-5 

1 

400 

268  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS  bk.  v 


The  conclusion  we  draw  from  these  tables  is  the  follow- 
ing. The  highest  value  of  product  obtainable  by  the  morith’s 
labour  awa.i Table  in — — that,  whipVi  d^ti^rTniries  its  own 
valuation — is  840  ; the  highest  value  obtainable  by  a month’s 
labour  available  in  1889  is  only  720;  while  the  highest  value 
obtainable  by  a month’s  labour  available  in  1890  and  1891 
is  630  and  525  respectively.  A-&  a.  bip.t.  therefore  the  present 
month’s  labmir  is  superior  to  all  future  onea.  not -only  in- 
t,p.ebmV.a.1  prodnetiyeness,  but  also  in  marginal  utility  a.ud  value. 

I repeat  emphatically  that  this  result  is  not  an  accidental 
one,  such  as  might  have  made  its  appearance  in  consequeKce 
of  the  particular  figures  used  in  our  hypothesis.  On  the  single 
assiunption  that  longer  methods  of  production  lead  generally 
to  a greater  product,  it  is  a necessary  result ; a result  which 
must  have  occurred,  in  an  exactly  similar  way,  whatever  might 
have  been  the  figures  of  quantity  of  product  and  value  of  unit 
in  the  different  years. 

I must,  further,  lay  particular  weight  on  the  fact,  that  this 
result  does  not  make  its  appearance  simply  because,  in  our 
hypothesis,  we  have  introduced,  as  already  active,  those  other 
two  circumstances  which  are  fitted  to  account  for  a surplus 
value  of  present  as  against  future  goods — namely,  a difierence 
in  the  circumstances  of  provision  at  the  various  periods  of 
time,  and  a diminution  of  the  future  utility  by  way  of  perspec- 
tive. The  superiority  in  value  of  present  means  of  production. 
which  is  based  on  their  technical  superiority,  is  not  one 

borrowed  from  these  circiimstanCes : it  would  emerge  of  its 
own  strength  even  if  these  were  not  active  at  all.  I have 
introduced  the  two  circumstances  into  the  hypothesis  only  to 
make  it  a little  more  true  to  life,  or,  rather,  to  keep  it  from 
bemg  quite  absurd.  Take,  for  instance,  the  influence  of  the 
reduction  due  to  perspective  entirely  nnt,  nf  the  illustration. 

and-we  get  the  following  fignre.s  .• — 


CHAP.  IV  INDEPENDENT  CAUSE  OF  SURPLUS  VALUE  269 


A ^ilONTH'S  LABOUR  OF  THE  YEAR 


U 

.o 

ao 

3 

3 


! 

1888. 

1889. 

1890. 

1891. 

1888 

500 

_ 



1889 

800 

400 

— 

— 

/ 1890 

924 

660 

330 

— 

1891 

875 

700 

500 

250 

1892 

880 

770 

616 

440 

1893 

924 

840 

735 

588 

1894 

940 

880 

800 

700 

1895 

\ 

750 

705 

660 

600 

We  see  that  now  the  absolute  figures  of  the  sums  of  value 
are  increased  throughout,  and  also  that  the  economic  centre 
of  gravity  is  transferred  to  another  year  but  the  thing  which 
concerns  us  is  that  the  result  remains  imchanged ; — -the 
month’s  labour  of  1888  shows  the  highest  figure  of  va.lnp.,  and 
aU  the  others  a decreasingly  smaller  one. 

But  if  we  were  also  to  abstract  the  difference  in  the 
circumstances  of  provision  in  different  periods  of  time,  the 
mtuation  would  receive  the  sta.mp  of  evtreme  imprnha.hility^ 
even  of  self-contradiction.  If  the  value  of  the  unit  of  product 
were  to  be  the  same  in  all  periods  of  time,  however  remote, 
the  most  abundant  product  woidd,  naturally,  at  the  same 
time  be  the  most  valuable.  But  since  the  most  abimdant 
product  is  obtained  by  the  most  lengthy  and  roundabout 
methods  of  production, — perhaps  extending  over  decades  of 
years, — the  economic  centre  of  gravity,  for  aU.  present  means 
of  production,  would^  on  this  assumption,  be  found  at  exv 

tremelv  remote  periods  of  time^ — which  is  entirely  contrary 
to  all  experience.  And,  besides,  if  such  a state  of  things  were 
to  emerge  at  any  particular  point  of  time,  it  would  imm^tlU 
ately  bring  its  own  correction-  For  if  every  employment  of 

^ e.g.  the  economic  centi’e  of  gravity  for  the  month’s  labour  of  1888  in  the 
former  case  lay  in  the  product  attainable  for  the  year  1890  ; it  now  lies  in  that 
attainable  for  1894. 

^ But  here,  all  the  same,  the  month’s  labour  of  1888  remains  superior  to  that 
of  1889.  For,  as  regards  any  one  remote  period,  say,  the  year  1988,  the  former, 
as  employed  in  a process  longer  by  one  year,  could  produce  a somewhat  greater 
product  than  the  latter. 


270  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS  bk.  v 


goods  for  future  periods  is,  not  only  technically,  but  economic- 
ally, more  remunerative  than  the  employment  of  them  for  the 
present  or  near  future,  of  course  men  would  withdraw  their 
stocks  of  goods,  to  a great  extent,  from  the  service  of  the 

prpfipnf,  and  dirp.p±..  them  to  the  more  remunerative  service  of 
the  future.  But  this  would  immediately  cause  an  ebb-tide  in 
the  provision  for  the  present,  and  a Hood  in  the  provision  for 
the  future,  for  the  future  would  then  have  the  double  advan- 
tage of  having  a greater  amount  of  productive  instruments 
directed  to  its  service,  and  those  instruments  employed  in 
more  fruitful  methods  of  production.  Thus  the  difference  in 
the  circumstances  of  provision,  which  might  have  disappear^ 
for  the  moment,  would  recur  of  its  own  accord. 

But  it  is  just  at  this  point  that  we  get  the  best  proof  that 
the  superiority  in  question  is  independent  of  differences  in  the 
circumstances  of  provision  : so  far  from  being  obliged  to  borrow 
its  strength  and  activity  from  any  such  difference,  it  is,  on 
the  contrary,  able,  if  need  be,  to  call  forth  this  very  difference. — 
Thus  we  get,  as  result  of  our  digression,  the  assured  con^dction 
of  two  things ; — first,  that  the  productive  superiority  of  pre- 
sent goods  assures  them,  not  only  a surplus  in  product,  but 
a surplus  in  value,  and,  second,  that,  in  this  suppriority, 
we  have  to  deal  with  a third  cause  of  the  surplus  vabm^  anr] 
oiqe  which  is  independent  of  any  of  the  two  already  mentioned,^ 

We  have  now  to  ask : To  what  extent  is  this  third  cause 
Of  this  our  former  analyses  give  a poor  and  inade- 
quate picture.  Wliat  has  been  said  is  only  sufficient  to 
explain  how  present  Means  of  Production  are  worth  more  than 
future  means  of  production.  But,  from  the  same  cause,  as  we 
b^^e  now  to  show,  present  cousninptinn  aonds  also  oihain  q 

^ Those  who  prefer  somewhat  more  venturous  generalisations  might,  perhaps, 
be  inclined  to  put  the  first  and  the  tl'.ird.  cause,  together  under  ore  enniman 
eateornry.  that  of  the  “technical  superiority”  of  present  goods.  For  the  prefer- 
ence given  to  present  goods  in  virtue  of  the  different  relations  of  provision 
also  rests  peculiarly  on  a technical  circumstance  ; namely,  that  they  allow  of  a 
“greater  choice  of  employments,  both  as  regards  present  and  future  wants,  while 
future  goods,  naturally,  are  adapted  to  serve  future  wants  only.  At  all  events, 
this  teclinioal  superiority  is  so  essentially  distinct  from  the  other  of  the  greater 
technical  prud/acUAty,  that  the  two  elements  would  require  again  to  be  kept 
separate  frorn  each  other.  It  appears  to  me,  therefore,  in  the  interests  of  clear- 
ness tliat  they  should  he  kept  entirely  distinct  from  the  first. 


CHAP.  IV 


EVEN  AS  CONSUMPTION  GOODS 


271 


preference  over  future  consumption  goods,  so  that,  in  this 
third  cause,  we  have  a quite  universally  valid  reason  for  present 
goods  having  a greater  value  than  future. 

The  connection  is  as  follows.  Command  over  a sum  of. 
presents  consumption  goods  provides  us  with  th^  Tnefli"^  '^■f 
snVifiist.pnr-p  dipping  the  Current  economic  period.  This  leaves 
the  means  of  production,  which  we  may  have  at  our  disposal 
during  this  period  (Labour,  Uses  of  Land,  Capital),  free  for  the 
technically  more  productive  service  of  the  future,  and  gives  us 
the  more  abundant  product  attainable  by  them  in  longer.  . 
methods  of  production.  On  the  other  hand,  command  over  m' 
sum  of  future  consumption  goods  leaves,  of  course,  the  present 
unprovided  for,  and,  consequently,  leaves  us  under  the  necessity 
of  directing  the  means  of  production  that  are  at  our  command 
in  the  present,  wholly  or  partially,  to  the  service  of  the  present. 
But  this  involves  curtailment  of  the  production  process,  and 
as  consequence,  a diminished  product.  The  difference  of  the 
two  products  is  the  advantage  connected  with  the  possession 
of  present  consumption  goods. 

To  illustrate  this  by  an  example  as  simple  as  it  is  well- 
worn.  Imagine,  witli  Ensr-.hp.rd  a,  trilie  of  hsher-folk  without 
capital,  subsisting  on  fish  left  in  pools  on  the  shore  by  tlie*^ 
ebb-tide  and  caught  with  the  bare  hand.  Here  a labourer  may 
catch  and  eat  three  fish  a day.  If  he  had  a boat  and  net  he 
could  catch  thirty  fish  a day,  instead  of  three.  But  he  cannot 
have  these  tools,  for  their  making  would  cost  him  a month’s 
time  and  labour,  and,  in  the  meantime,  he  would  have  nothing 
to  live  upon.  To  save  himself  from  starvation  he  must  con- 
tinue his  wretched  and  costly  fishing  by  hand.  But  now  some 
one  cleverer  than  the  rest  borrows  ninety  fish,  promising, 
against  the  loan,  to  give  back  a hundred  and  eighty  fisii  after 
one  month.  With  the  borrowed  fish  he  supports  liimself 
during  a month,  makes  a 1)oat  and  net,  and,  during  the  next 
month,  catches  nine  hundred  fish  instead  of  ninety.  From  tins 
take,  not  only  can  he  make  the  stipulated  payment  of  a hundred 
and  eighty  fish,  but  he  retains  a considerable  net  gain  to 
himself,  and  thereby  affords  a striking  piuof  that  the  ninetv 
(present)  fish  he  borrowed  were  worth  to  him-  not  only  nmch 
more^than  the  ninety,  but  even  more  than  the  hundred  and 
eighty  (future)  fish  he  paid  for  them. 

1 Grundlagcn,  § 189. 


272  TECHNICAL  SUPERIORITY  OF  PRESENT  GOODS  bk.  v 


Now,  of  course,  the  differences  in  value  are  not  always  so 
great  as  in  this  example.  They  are  greatest  among  people 
who  live  from  hand  to  mouth,  For  them  to  get  command 
over  present  consumption  goods  means  the  transition  to 
capitahst  production.  Less  striking,  but  always  present,  is  the 
difference  where  people  already  possess  a certain  stock  of  goods. 
If  for  cyamplR^  their  stock  of  goods  is  sufScient  for  three  years, 

they  may  realise  their  means  of  production  in  an  average  three 

years’  production  process.  If,  now,  by  some  means  or  other, 
they  obtain  another  year’s  supply  of  present  means  of  sub- 
sistence, they  may  extend  their  average  production  period  from 
three  to  four  years,  and  obtain  thereby  an  increment  of  product 
which,  absolutely,  is  always  important,  but,  relatively,  will  be 
much  less  than  in  the  first  case. 

We  can  see  that  here,  again,  the  matter  of  fact,  on  which  I 
base  my  conclusions,  is  an  old  and  well-known  one ; even  in 
the  time  of.^AdaiB-gnaith  and  Turgot,  it  was  notorious  tha|. 
the  possession  of  present  consumption  goods  confers  certain 
advantages.  But  as  the  older  theory  of  capital  was,  generally 
speaking,  a nest  of  warped  conceptions  and  incorrect  explana- 
tions, this  fact  also  was  put  down  in  a form  as  singular  as  it 
was  inappropriate.  Consumption  goods- — goods  for  immediate 
consumption — were  looked  on  as  productive  goods,  or  means  of 
production ; as  such  they  were  counted  capital ; and  then  all 
the  advantages  inherent  in  them  were  explained  by  the  pro- 
ductivity of  capital.  Indeed,  a writer  of  the  standing  of  Jevons, 
simply  through  dwelling  on  the  great  importance  which  attaches 
to  the  command  over  present  goods,  was  misled  into  ascribing 
to  consumption  goods  the  high  pogitiorL-mf-heing  the  only: 
capital ! In  face  of  such  misinterpretations  our  business  now 
is  to  get  at  the  truth  of  facts.  And  the.  facts  are  very  simple. 
Consumption  goods  are  not  means  of  production  : they  are, 

therefore,  not  capital ; and  the  advantages  which  they  confer 
do  not  proceed  from  any  productive  power  they  possess.. 
Everything  turns  on  the  simple  fact  that,  according  to  the 
quite  familiar  laws  of  value,  present  goods,  in  virtue  of  the 
above  stated  casuistical  connection  of  circumstances,  are,  norm- 
ally, the  means  of  obtaining  a higher  marginal  utility,  and 
receive  thereby  a higher  value,  than  future  goods. 


CHAPTEE  V 


CO-OPERATION  OF  THE  THREE  FACTORS 

To  put  together  the  results  at  which  we  have  arrived  thus  far. 
We  have  seen  that  there  are  three  factoig.  each  of  which,  in- 
dependently of  the  other,  is  adequate  to  account  for  a difffirp.ucp. 
in  value  between  present  and  future  goods  in  favour  of  the 
former.  These  three  factors  are : The  difference  in  the  “N 
circumstances  of  provision,  between  present  and  future ; the  / 
nnrlp.rpst,iTna.tp.,  due  to  perspective,  of  future  advantages  and  \ 
future  goods;  and,  finally,  the  greater  fruitfulness  of  lengthy  j 
methods  of  production.  The  question  now  is ; — how  do  these  / 
factors,  working  simultaneously,  affect  each  othnr  ? 

About  the  two  first  factors  we  know  already : their  effects 
are  cumulative.  In  the  case  of  a man  badly  provided  for  in 
the  present,  if  the  marginal  utility  of  a present  good  were  100, 
and  its  true  marginal  utility  in  a future  period  only  80,  the 
present  good  would  be  valued,  relatively  to  the  future,  in  the 
ratio  of  100  to  80,  if  no  other  influence  intervened.  Put  if 
there  is,  besides,  a,  persnective  diniinution  of  the  true  future 

marginal  utility,  say  by  one-eighth,  the  marginal  utility  would 
be  put  at  70  instead  of  80,  and  the  superiority  of  the  present 
good  to  the  future  would  be  in  the  ratio  of  100  to  70. 

It  is  essentially  different  with  the  co-operation  of  the  third 
factor.  Trun.  it  also  tends  to  strpngthp.n  the  ant-m"  r>f 
other  factors,  hut  it  does  so  alternatively,  not  cumulatively ; 
that  is  to  say,  that  factor  which  confers  the  greater  advantage 
on  present  goods  always  stands  out  from  the  other  as  the 
active  agent.  Say,  for  example,  that  the  first  factor  (the  cir- 
cumstances of  provision),  together  with  the  second  factor  (that 
of  perspective),  taken  cumulatively,  would  give  present  goods 

T 


274  CO-OPERATION  OF  THE  THREE  FACTORS  book  v 


an  advantage  of  30^,  while  the  factor  of  productivity  would 
give  an  advantage  of  25^,  we  should  not  get  a total  advantage 
of  55*^,  but  of  30^,  the  advantage  being  based  ou  the  atrongp.v 
factors^ 

yy  The  matter  stands  thus.  The,  superiority  of  present  goods, 
as  making  roundabout  and  more  fruitful  ways  of  production 
possible,  Qannot  be  increased  by  the  perspective  undervaluation 
of  future  goods,  because  the  utihtv  got  from  lengthy  processes 
is  itself  a future  utility,  to  which  the  perspective  undervaluation 
applies  as  mu(A  as  it  applies  to  the  future  goods  with  which 
the  present  goods  are  compared.  Say  that,  by  employing  a 
month’s  labour  now,  in  1888,  in  a one  year’s  process,  I can 
make,  for  1889,  a product  of  200  units,  and,  by  employing  a 
month’s  labour  of  1889,  I can  make  for  that  same  year — on 
account  of  the  short  and  unproductive  method — a product  of 
100  units  only,  it  will  he  a reason  for  my  valuing  the  present 
month  of  labour  at  double  the  next  year’s  month.  If,  now, 
there  comes  in  a ten  per  cent  imdervaluation  of  next  year’s 
utility,  I shall,  of  course,  value  the  next  year’s  100  units 
at  9 0 present  units  only ; but,  for  exactly  the  same  reason,  I 
shall  value  the  200  units  at  180  present  units  only;  and  the 
ratio  of  valuation,  two  to  one,  remains  exactly  as  if  the  perspec- 

tive undervaluation  had  never  come  iuto  play  at  all. 

/ As  little  cap  the  third  factor  he  strengthened  by  the  first 
factor,  namely,  the  consideration  of  a greater  present  want. 
For,  evidently,  employing  a good  to  a great  future  productive 
utility,  and  employing  it  to  satisfy  an  immediate  pressing  want, 
are  mutually  exclusive  employments ; and  it  is  clear  that-a 
good,  which  can  ouly  he  employed  in  the  one  wav  or  the  other., 
cannot  obtain  a cumulative  advantage  from  the  two  together. 

But  these  two  factors  do  work  into  each  other’s  hands  in 
the  following  way.  Present  goods  may  he  used  to  meet  present 
wants,  or  they  may  be  invested  in  production  for  the  future. 
These  are  the  two  possible  employments  to  which  each  indi- 
vidual may  put  his  present  goods.  According  to  principles 
with  which  we  are  familiar,  the  stock  of  goods  wiU  be  guided 
into  these  employments  in  such  a way,  that  the  most  important 
chances  of  using  the  goods  are  utilised  first,  the  next  important 
second,  and  so  on  down  the  scale.  Here,  however,  it  is  to  be 
noted  that  the  employments  in  prodiicing  for  the  future,  as 


CHAP.  V 


CUMULATIVE  AND  ALTERNATIVE 


275 


Standing  over  against  the  employments  in  the  satisfaction  of 
immediate  wants,  must  submit  to  the  perspective  diminution 
^Yith  which  we  are  familiar.  Say,  for  instance,  that  a man’s 
particular  circumstances  are  such  that  he  estimates  a utility, 
falling  due  in  the  following  year,  at  10^  less  than  an  equally 
great  present  utility ; then  a future  utility  of  110  becomes 
equal  to  a present  utility  of  100,  and,  on  that  account,  when 
there  comes  to  be  a choice  between  employments,  the  future 
utility  of  110  may  be  postponed  to  a present  utility  of  102. 
The  last  employment,  then,  which,  on  these  principles,  is  still 
supphed  from  the  stock  of  goods,  indicates,  as  we  know,  the 
marginal  utnity,  and,  at  the  same  time,  the  value  of  the  unit 
of  goods. 

Now  the  following  cases  may  occur.  JFirst.  the  indi^ddual 
may  be  badly  off  in  the  present  In  that  case  the  pressing 
wants  of  the  moment  will,  by  themselves,  absorb  the  small 
stock  of  present  goods,  and,  on  the  ground  of  this  bad  provision' 
in  the  present,  these  goods  will  obtain  a high  value  and  a prefer- 
ence over  future  goods.  The  needy  man  prefers  present  goods 
because  he  w/iist  consume  them  in  the  present.  The  opportuni- 
ties of  employing  the  goods  for  productive  purposes  in  the 
future  remain  in  this  case — since  the  poverty-stricken  present, 
naturally,  cannot  afford  any  goods  for  purposes  beyond  itself — 
out  of  court  as  economically  impossible,  and,  of  course,  without 
any  influence  on  the  A^alue,  or  preferable  value,  of  present  goods. 

Or,  second,  the  nidividual  may  be  equally  well  provided  as 
regards  both  present  and  future,  but  mav  have  less  forethought 
This  case  leads  to  a similar  result.  Before,  it  was  urgent  want 
that  prevented  portions  of  the  stock  of  goods  from  being  with- 
drawn from  the  service  and  enjoyment  of  the  present,  and 
invested  in  future  production : now,  it  is  want  of  thought  for  the 
future : and  this  want  of  thought  confers,  at  the  same  time,  on 
the  present  enjoyment,  and  on  the  present  goods  which  minister 
to  it,  a preference  over  future.  The  spendthrift,  greedy  of 
pleasure,  values  present  goods  more  highly  than  future,  because 
he  wishes  to  enjoy  them  in  the  present. — If  bad  provision  goes 
along  with  small  foresight,  the  two  effects,  as  we  have  seen,  are 
cumulative. 

Ox.  third,  the  individual  is  well  provided,  and  takes  due 
thought  for  the  future.  In  this  case,  of  course,  the  two  former 


276  CO-OPERATION  OF  THE  THREE  FACTORS  book  v 


sanctions  of  the  preference  do  not  come  into  play  at  all,  or 
scarcely  at  all.  Tn  this  case,  beyond  the  satisfying  of  the 
immediate  wants,  the-othp.^  ennrse  is  ppoTimnieHlIy  open, — of 
investing  a portion  of  his  present  goods  in  production  for 
the  future : thereby  their  economic  centre  of  gravity,  their 
marginal  utility,  and  the  formation  of  their  value,  are  shifted 
to  a sphere  in  which  present  goods  enjoy  a preference  in  value 
under  the  third  sanction,  that  of  their  greater  productiveness. 
A moderately  rich  and  prudent  man  who  has  £10,000,  must 
not,  and  will  not  Consume  his  £10,000  in  the  present,  but  will, 
in  any  case,  save  for  the  service  of  the  future.  But  if  any  one 
were  to  make  him  the  proposal,  to  exchange  his  £10,000 
of  present  money  for  £10,000  of  future  money,  he  would  be 
fully  justified  in  declining  the  transaction ; as,  with  £10.000 
faowl  he  can  provide  more  effectually  and  richly  for  the  future 

than  with  £10.000  at  a future  period. 

But,  finally,  there  is  still  a fourtb_-case— conceivable : an 
individual  may  be  so  badly  off  in  the  present,  or  have  so  little 
thought  for  the  future,  that,  on  those  two  accounts,  he  values 
present  goods  more  highly  than  future.  At  the  same  time, 
however,  he  is  tempted  by  business  which  promises  him  so 
good  a return  in  the  future  that  he  stints  himself  Still  further 
in  his  present  provision,  and  engages  in  the  business.  Here, 
after  the  analogy  of  the  case  worked  out  on  p.  165,  the  avail- 
able sums  of  goods  are  directed,  successively,  into  the  most 
important  employments  of  the  two  spheres  taken  together,  and 
the  competition  of  these  future  employments  has  for  result^ 
^hat  the  satisfaction  of  present  wants  is  broken  off 
point  or  level  than  it  would  otherwise  be..  This  must,  in  the 
end,  xaise  the  value  of  present  goods,  and  indirectly  increase 
their  superiority  over  future.^ 

Thus  the  various  sanctions  come  alternatively  into  play. 

1 Suppose,  e.;/.,  that  a man  has  6 units  of  goods,  say  6 five-pound  notes,  at 
his  disposal.  There  are  present  groups  of  wants,  whicli  these  nt)tes  could  sujjply, 
and  their  importance  ia  indicated  by  the  figures  10,  9,  8,  7,  6,  5.  Now  there 
appear  opportunities  of  employing  these  in  business  transactions  which  will  not 
yield  any  result  for  a year,  but  are  so  profitable  that,  even  after  deducting 
the  necessary  dis-agio  on  account  of  the  year’s  delay,  they  are  equal  to  a present 
utility  of  7.  The  following  will  evidently  be  the  disposition  of  the  notes.  Four 
of  them  will  go  to  the  present  wants  which  bear  the  utility  10,  9,  8,  7,  the 
remaining  two  to  the  future  employments  which,  likewise,  show  the  (reduced) 


CHAP.  V 


IN  FA  VO  UR  OF  PRESENT  GOODS 


277 


Where  the  lirst  two  are  active  the  third  is  suspended : but  where 
^e  first  two  are  riot  active,  or  not  sufficiently  active,  there 

comes  in  the  actiou  of  the  thirfl.  One  can  easily  understand 
how  very  directly  this  circumstance  is  calculated  to  give  the 
phenomenon  of  the  higher  valuations  of  present  gnod.q  a.n  almost 
universal  vahditv.  The  needy  and  the  careless  value  present 
goods  more  highly  because  they  urgently  require  them  in  the 
present,  or  only  think  about  the  present : the  well-nff  ami, 
the  saving  value  them  because  they  can  accomphsh  more 

^^'tb  them  in  the  future : and  thus,  in  the  long-run,  every  one, 
whatever  his  economical  position,  and  whatever  his  economical 
temperament,  has  some  ground  for  valuing  present  goods  more 
highly  than  future.  And,  further,  it  is  easy  to  understand  how 
much  the  universal  emergence  of  subjective  differences  in  valua- 
tion must  favour  the  extension  of  this  phenomenon  to  the  spheru 
of  objective  exchange  value  and  price.  If  the  third  factor  were 
to  act  cumulatively  with  the  two  first  there  would,  indeed,  be 
many  who  would  value  present  goods  at  an  extravagant  rate, 
but  it  is  not  certain  that  there  would  not  be  as  many;  perhaps 
an  overwhelming  majority,  who  would  have  no  preference 
for  present  goods,  and  it  is  doubtful  how,  in  this  case,  the 
resultant  of  exchange  value  would  turn  out.  "Rut  as  tbp,  tbirrl 
factor  is  alternative  in  ite  ant, inn,  it  levels  up.  as  it  were,  the 

f|pprp.c;sinug  iustpafl  nf  PYaggprating  individual  heights  ; thus  it 
brings  about  a general  raising  of  subjective  valuations;  and  this 
is  necessarily  connected  with  a raising  of  the  average  line,  the 
resultant  exchange  value.^ 

figure  7.  The  marginal  utility  which  attaches  to  the  present  five-pound  note  is. 
therefore,  7,  while,  without  the  competitiou  of  the  profitable  future  eniployTnp.Tira, 
it  would  have  been  only  5. 

^ The  statement  of  how  the  productivity  of  capital  works  into  and  together 

with  the  other  tWo  grounds  of  the  higher  valuation  of  present  goods.  I consider 

one  of  the  most  diflScuIt  points  in  the  theory  of  interest,  and,  at  the  same  time, 
the  one  which  must  decide  the  fate  of  that  theory.  It  is  just  at  this  point  that  we 
discover  the  chief  weakness  in  Jevons’s  otherwise  suggestive  work.  None  of  the 
groups  of  phenomena  concerned  escaped  his  keen  observation  ; what  did  escape 
him  was  the  way  in  which  they  work  into  one  another.  Consequently  his  work 
remains  an  eclectic  piece  of  patchwork  instead  of  being  welded  into  an  organic 
theory.  He  gathers  together  quite  correctly  all  the  primary  phenomena  required 
for  the  explanation.  But  he  does  not  find  the  common  channel  through  which  they 
qll  work  together  to  the  one  common  end,  and  so  he  explains  it  differently  from  each 
diflferent  point  of  view,  with  a result  that  is  eclectic  and  self-contradictory.  After  a 
most  promising  beginning  he  quite  loses  sight  of  the  element  of  the  different  valua- 


278  CO-OPERATION  OF  THE  THREE  FACTORS 


BOOK  V 


Here  we  come  to  our  last  duty  in  this  book : to  show  how 
the  ratio  that  obtains  between  present  and  future  goods  in 
subjective  valuations  is  transferred  to  their  objective  p.vchange 
value. 

In  the  case  of  the  single  individual,  extremely  various  sub- 
jective valuations  will  be  formed,  according  as  the  one  or  the  other 
of  the  above-mentioned  factors  is  stronger  or  weaker.  These 
encounter  each  other  on  the  market  where  present  goods  are 

exchanged  against  future.  There  are  many  such  markets  and 
they  take  many  different  forms.  In  the  next  book  we  shall 
more  exactly  examine  their  constitution.  In  the  meantime 
we  must  be  content  to  examine  the  method  in  which  prices  are 
formed  in  its  most  general  and  typical  outlines.  Indeed  the 
formation  of  price  here  takes  the  same  course  as  it  does  else- 
z^here.  The  divergence  of  the  subjective  valuations  which 
encounter  each  other  on  the  market  makes  possible,  economically. 
the  exchange  of  property  between  the  twn^arties.^  Those 
who,  on  any  subjective  grounds,  put  a relatively  high  value 
on  present  goods,  appear  as  buyers  of  present  against  future 
commodities  ; those  who  put  a relatively  low  value,^  as  sellers  : 
and  the  market  price  will  be  se  tied  betweeiL  the  snbjectiyg 
valuations  of  the  last  competitors  who  actually  exchange,  and 
the  first  competitors  who  are  shut  out,  or,  as  we  have  put  it. 


tions  put  upon  present  and  future  wants,  and  for  the  rest  gives  a double  explanation, 
full  of  contradictions,  and  scarcely  rising  much  above  the  level  of  the  old  classical 
economy, — part  of  it  taken  from  the  Abstinence,  part  from  the  Productivity  theory. 
(See  my  Capital  and  Interest,  p.  400. ) The  not  very  independent  treatment  which 
the  subject  has  received  from^Sa^  is  in  one  respect  better,  while  in  another  it  is 
even  more  incomplete  than  that  of  Jevons.  It  shows  an  advance  to  find  the 
element  of  the  undervaluation  of  future  wants  generally  interwoven  into 
the  explanation  of  interest.  (See  also  on  this  point  Launhardt,  Mathematisclie 
Begriindung  dcr  Volkswirthschaftslehre,  Leipsic,  1885,  § 2,  and  again  my  Capital 
and  Interest,  pp.  344, 427. ) But,  on  the  other  hand,  it  is  a sensible  omission  that  the 
difference  between  the  values  of  present  and  future  goods  is  traced  exclusively  to 
this  factor,  and  that  the  much  more  important  factor  that  co-operates  with  it, 
that  of  the  greater  nroductivenes^does  not  get  evrp  scanty  consiHeratirm 
it  gets  from  Jevons.  (Sax,  Orandlegung,  p.  314.) 

^ See  above,  p.  195. 

- For  reasons  with  which  we  are  now  familiar  almost  all  the  competitors. 
whether  buyers  or  sellers,  will  value  present  goods,  absolutely,  above  futuie.  But 
the  valuation  will  be  higher  on  the  part  of  the  buyers,  as  a class,  than  on  the 
part  of  the  sellers. 


CHAP.  \' 


IN  OBJECTIVE  EXCHANGE  VALUE 


279 


between  the  valuations  of  the  two  marginal  pairs.  We  may 
represent  the  position  of  the  market  by  the  following  scheme : — 


Intending 

Buyers. 

Present 
goods 
in  units. 

Next  year’s 
goods  in 
units. 

Intending 

Sellers. 

Present 
goods 
in  units. 

Next  year’s 
goods  in 
units. 

A,  values  100 

= 300 

B,  values  100 

= 99 

Ao 

J) 

200 

Jf 

100 

^3 

150 

91 

101 

120 

B4 

ft 

102 

jy 

110 

B5 

ft 

103 

>> 

103 

Be 

It 

105 

107 

B. 

19 

106 

-^8 

106 

Bg 

t1 

107 

^9 

104 

B9 

t1 

108 

Aio 

102 

Bio 

ft 

110 

In  the  circumstances  of  tlie  market  which  this  scheme 

represents.  A,  and  B.,.  form  the  upper  marginal  pair,  Ag  and 

the  lower.  The  market  price  for  100  present  units  of  goods 
will  be  fixed  between  106  and  107,  say  at  106^  next  year’s 
units,  and  this  determines  an  agio  of  in  favour  of 

present  goods. 

Once  a market  price  of  this  kind  for  present  goods  has 
been  established,  it  exerts  a reflex  levelling  influence  on  the 
subjective  valuations  which  were  originally  so  strongly  divergent. 
Even  those  who,  from  personal  circumstances,  would  value 
future  goods  only  a little  under,  or  perhaps  at  equal  terms 
with,  present  goods,  now  value  present  goods  according  to  the 
higher  e:^<-^h^^g^  valnp  winch  the  position  of  the  market  1end.s_ 
to  them.  This  is  the  reason,  and  the  only  reason,  why,  in 
practical  hfe,  scarcely  any  one  would  be  willing  to  exchange 
present  goods  against  an  exactly  equal  sum  of  future  ones. 
There  are  plenty  of  people  whose  circumstances  of  want  and 
provision  for  want  are  of  such  a kind,  that  the  subjective  use 
value  of  present  and  future  goods  to  them  stands  almost  equal. 
But  the  general  nosition  of  the  market  is.  almost  invariably. 

so  strongly  in  favour  of  present  goods,  that  it  assure.s  th£>iri_a. 
preference  in  exchange  value,  of  which,  naturally,  every  one 
takes  advantage. 

Developed  market  exchange,  however,  brings  with  it  a 

levelLing  effect  from  another  side ; that  is  to  say,  it  brings  the 


280  CO-OPERATION  OF  THE  THREE  FACTORS  book  v 


amount  of  agio  in  favour  of  present  goods,  as  against  future 
goods  which  fall  due  at  variously  remote  points  of  time,  into 
one  normal  ratio  with  the  length  of  the  elapsing  time.  It 

might  easily  he  the  case  that  the  causes  which  tend  to  the 
xindervaluation  of  future  goods  might  chance  to  he  quite  dis- 
proportionately effective  on  goods  belonging  to  different  periods 
of  time.  Indeed,  in  the  very  nature  of  several  of  those  causes 
(for  instance,  the  consideration  of  the  shortness  of  human  life) 
they  would  scarcely  obtain  at  all  as  against  goods  of  the  near 
future,  while,  as  against  goods  of  remote  periods,  they  would 
obtain  strongly  and  irregularly.  In  itself,  therefore,  it  might 
be  quite  possible  that,  while  100  present  units  of  goods,  as 
against  100  units  of  next  year’s  goods,  obtained,  in  the  market, 
an  agio  of  5 units  only,  as  against  goods  of  the  next  year  they 
might  obtain  an  agio  of  more  than  twice  that,  sav  20.  and, 
as  against  the  third  year’s  goods,  perhaps  an  agio  of  40.  But 
such  disproportionate  prices  for  goods  of  different  periods  of 
remoteness  could  not  long  hold.  By  a kind  of  time  arbitrage  they 
would  very  soon  be  brought  into  an  equal  ratio.  If,  for  instance, 
the  various  market  prices  mentioned  above  were  found  quoted 
at  one  given  moment,  speculators  would  immediately  appear 
on  the  scene,  who  would  sell  present  goods  against  two  years’ 
goods,  cover  the  purchase  by  buying  present  against  next  year’s 
goods,  and  arrange  for  paying  the  latter  a year  later  by  a 
second  purchase  of  present  against  next  year’s  goods.  The  busi- 
ness would  work  out  thus.  In  1888  the  speculator  buys  1000 
present  units  for  1050  units  of  the  year  1889,  and  sells  them 
at  the  same  time  for  1200  of  the  year  1890.  In  1889  he 
has  to  deliver  1050  units,  and  he  gets  them  by  buying,  again 
with  a agio  of  5^,  the  then  present  (1889)  goods  for  the 
then  next  year’s  (1890)  goods.  For  the  1050  units  he 
requires  to  deliver  he  must  thus  give  1102-|-  units  of  1890. 
But,  from  the  first  transaction,  he  then  receives  1200  of  these 
very  (1890)  units.  He  has  thus,  on  the  whole  business,  a 
utility  of  about  100  units.  Such  arbitrage  transactions  must 
evidently  bring  the  prices  obtainable  for  goods  of  various  future 
years  to  a level.  The  speculative  demand  for  the  much  under- 
valued two  years’  goods  must  raise  their  price;  the  supply  of  next 
year’s  goods  must  depress  their  price ; till  such  time  as  the  agio 
is  brought  directly  into  proportion  with  the  length  of  the  timq. 


CHAP.  V 


SUMMARY  OF  PRESENT  BOOK 


281 


Whp.Ti  this  happftBfl — f^r  pYampIp.,  1.V>p  agio  has  hpp.nmp. 

equalised  at  5^  y^r  year,  it  may  hold  on  fit,  that  ratp  HnHiRtnrhp.fl. 
I^r  then  it  is  equally  remunerative  tp  exchange  present  goods 
against  next  year’s  goods  for  three  years,  successively,  or  to 
exchange  present  goods  directly  against  three  years’  goods,  and 
the  arbitrage  we  have  just  sketched  has  no  further  occasion  to 
interfere  in  the  formation  of  price. 

Thus  we  may  accept  the  following  as  positive  result  of  the 
present  book. 

The  relation  between  want  and  provision  fqr  want  in  present 
and  future,  the  undervaluation  of  future  pleasures  and  pains, 
and  the  technical  advantage  residing  in  present  goods,  have  the 
effect  that,  to  the  overwhelming  majority  of  men,  the  subjective 
use  value  of  present  goods  is  higher  than  that  of  similar  future 
goods.  From  this  relation  of  subjective  valuations  there  follows, 
in  the  market  generally,  a higher  objective  exchange  value  and 
market  price  for  present  goods,  and  this,  reflecting  back  on 
present  goods,  gives  them  a higher  subjective,  (exchange)  value 
even  among  those  whose  personal  circumstances  happen  to  be 
such  that  the  goods  would  not  naturally  have  any  preference 
in  subjective  use  value.  Finally,  the  levelliTig  tp.ndencie.s  of 
the  market  bring  the  reduced  value  of  future  goods  into 

a regular  proportion  to  their  remotp,np.R.s  in  time.  In  the 
economic  commiinity,.  then,  we  find  universally  that  future 
goods  have  a less  value,  both  subjective  and  objective,  corre- 
sponding to  the  degree  of  their  remoteness  in  time. 


BOOK  VI 


TirE  SOURCE  OF  INTEREST 


CHAPTEE  I 


THE  LOAN  AND  LOAN  INTEREST 

In  the  previous  book  I tried  to  show,  and  account  for, 
the  natural  difference  that  exists  between  the  value  of  present 
and  the  value  of  future  goods.  I have  now  to  show  that  this 
difference  of  value  is  the  source  and  - origin  nf . all  Interest  on 
Capital.  But  as  the  exchange  of  present  commodities  for 
future  commodities  takes  various  forms,  the  phenomenal  forms 
of  interest  are  as  various,  and  our  inquiry  must  necessarily 
deal  with  them  all.  In  the  following  chapters,  therefore,  _I 
intend  to  take  up.  in  succession,  all  the  principal  forms  of 

interest,  and  I shall  endeavoiu’  to  show  that,  notwithstanding 
all  differences  in  shape  and  appearance,(^e  active  cause  in 
them  all  is  one  and  the  same,  namely,  the  difference  in  value 
between  present  and  future  good^ 

By  far  the  simplest  case  of  this  difference  in  value  is 
presented  in  the  Loan.  A loan  is  nothing  else  than  a real 
and  true  exchajige  of  present  goods  for  future  goods  ; indeed, 
it  is  the  simplest  conceivable  phenomenal  form,  and,  to  some 
extent,  the  ideal  and  type  of  such  an  exchange.  The  “ lender,” 
A,  gives  to  the  “ borrower,”  B,  a sum  of  present  goods — 
say,  present  pounds  sterling.  B gets  full  and  free  possession 
of  the  goods  to  deal  with  as  he  Hkes,  and,  as  equivalent,  he 
gives  into  A’s  fuE  and  free  possession  a sum  of  entiiely  similar, 
but  future,  goods — say,  next  year  s pounds  sterling. 

Here,  then,  is  a mutual  transfer  of  property  in  two  sums 
of  goods,  of  which  one  is  given  as  recompense  or  pajunent  for 
the  other.  Between  them  there  is  perfect  homogeneity,, but 
for  the  fact  that  the  one  belongs  to  the  present,  the  other  to 
the  future.  I cannot  imagine  how  an  exchange  in  general. 


286 


THE  LOAN  AND  LOAN  INTEREST 


BOOK  VI 


and  an  excliange  between  present  and  future  goods  in 
particular,  could  be  expressed  more  simply  and  clearly.  ISTow, 
in  the  last  chapter,  we  proved  that  the  resultant  of  Jdie 
sii bjeetiv-c  vahiations  which  determines  the  marlcet  price  of 
present  and  future  goods  is,  as  a rule,  in  favour  of  present 

goods.  The  borrower,  therefore,  will,  as  a rule,  purchase  the 
money  wliich  he  receives  now  by  a Imger  sum  of  money 
which  he  gives  later.  He  must  thus  pay  an  “ agio  ” or  nre- 
miuin  (Anfqdd),  and  this  auio  is  iuteroat.  Interest,  then,  conies, 
in  the  most  direct  way,  from  the  difference  in  value  between 
present  and  future  goods. 

This  is  the  extremely  simple  explanation  of  a transaction 
which,  for  hundreds  of  years,  was  made  the  subject  of  inter- 
pretations very  involved,  very  far-fetched,  and  very  untrue. 
Since  the  days  of  Mohnseus  and  Salmasius,^  the  T.oan  has 
been  conceived  of  as  a transaction  analogous  to  the  Hire ; as 
a transfer  of  the  temporary  use  of  fungible  goods.  This 
method  of  interpretation  seems  simple  and  natural  enough. 
It  has,  too  the  advantage  and  support  of  being  in  harmony 
with  popular  ideas  and  popular  speech.  We  do  not  say,  “ I 
sell  you,  or  exchange  you  £100,”  but,  “I  lend  you  £100.” 
The  tiansaction  is  a loan,  and  interest  a usura.^  a use  of 
money.  But,  before  a scientific  basis  could  be  given  to  this 
popular  conception,  a whole  series  of  subtilties  had  to  be  in- 
vented, and  to  obtain  these  out  of  the  circumstances  of  actual 
life  taxed  all  the  resources  of  sophistry. 

First  it  had  to  be  shown  that,  in  transferring  a thing,  it 

is  ■ pos.sibift  to  transfer  more  than  the  whole_Qf  it ; namely, 
that  in  giving  the  borrower  possession  of  the  loaned  thing,  it 
is  possible  to  transfer  to  him  the  right  to  all  and  every  use 
that  can  be  made  of  the  thing,  even  to  the  consumption  that 
annihilates  it,  and,  besides  that,  the  right  to  a separate  kind  of 
remnant  use,  for  whicli  a separate  claim,  the  claim  of  interest, 
can  be  made.  Then  the  further  subtiltv  had  to  be  ■in  vented  . 
that,  in  perishable  goods — goods  which  perish  in  the  act  of 
use — there  is.  all  the  same,  a continuous  use,  ever  rising  anew 
from  its  own  ashes  ; a use  which  lasts  even  when  the  good 
“ used  ” has  long  ceased  to  exist ! It  had  to  be  discovered 
that  a cwt.  of  coal  can  be  burned  to  cinders  on  1st  January 
^ .See  my  Capital  and  Interest,  p.  29. 


CHAP.  I 


MIS  UNDERS  TANDINGS 


287 


1888,  and  yet  be  “ used  ’ uninterruptedly  throughout  the  whole 
year,  and,  perhaps,  for  five,  or  ten,  or  a hundred  years  to  come ; 
and,  what  is  best  of  all,  that  this  lasting  use  can  always  be 
bought  for  a particular  price,  although  and  after  the  coal 
itself,  and  the  right  to  consume  it  to  the  last  atom,  has  been 
given  away  for  another  and  a different  price  ! 

In  my  former  book,  Ca^pital  and  Interest,  I subjected  this 
singular  theory  to  a searching  critical  examination.  I showed 
how,  under  peculiar  historical  conditions,  it  came  into  the 
world  as  the  birth  of  circumstances,  in  which,  to  save  interest 
and  justify  it  against  the  unquestionably  unjust  attacks  of 
the  canonists,  a decent  foundation  had  to  l^e  found  for  it  at 
any  price,  or,  if  not  found,  invented.  T _ sKowed  that  this 
theory  had  its  troubled  source  in  a fiction.  It  was  a fiction 
adopted,  in  its  time,  by  the  old  jurists,  in  full  consciousness 
that  it  was  simply  a fiction  set  up  for  certain  practical  legal 
purposes ; but  afterwards,  by  a strange  misunderstanding,  this 
fiction  was  adopted  as  a sufficient  scientific  fact.  I tried, 
further,  to  show  that  this  theory  is,  in  itself,  full  of  mistakes, 
internal  contradictions,  and  impossibilities,  and  how,  finally, 
when  carried  to  its  logical  conclusion,  it  leads  inevitably  to 
further  contradictions  and  impossibilities.  In  opposition  to  it. 
and  in  place  of  it,  1 now  offer  my  own  positive  theory,  then 
unpublished,  and  confidently  leave  it  to  the  reader  to  judge 
on  which  side  lies  illusion  and  error,  and  on  which  truth.^ 

I would  gladly  refrain  from  any  further  commentary 
here,  were  it  not  that,  quite  recently,  we  have  had  a new 
literary  pronouncement  in  favour  of  the  Use  theory  which  I 
opposed,  and  directed  against  the  Exchange  theory  which  I 
advocated ; and  were  it  not  that  this  revived  pronouncertient 
emanates  from  no  less  authority  than  Karl  Knies. 

In  1885  Knies  published  a second  edition  of  his  book 
Das  Geld.  In  it  he  replies  to  the  criticism  I made  on 
some  passages  of  his  first  edition,  and,  at  the  same  time, 
expressly  Tepee.ts  certain  positive  objections  he  had  made  to 
the  conception  of  the  loan  as  an  Exchange.,  On  both  counts 
I feel  bound  to  anSwer. 

It  is  unfortunate  that  Knies’s  reply  touches  only  one  of 
the  many  points  on  which  I attacked  his  Use  theory.  I had, 

^ See  Capital  and  Interest,  pp.  214-259. 


288 


THE  LOAN  AND  LOAN  INTEREST 


BOOK  VI 


among  other  objections,  put  forward  this; — that  bis  mp.t-.bnfi 
of  nroviiig  the  actual  existence  of  a durable  use,  in  penshable^ 
goods  rested  on  a dialectical  confusion ; and  I had  endeavoured 
to  strengthen  my  contention  by  an  exact  analysis  of  the  very 
words  of  his  arguments  To  this  Knies  answers  that  I have, 
notwithstanding,  mistaken  his  meaning,  and  he  repeats  his 
positive  statement  in  such  “altered  expression,  and  with  such 
additions  ” as  may  put  his  real  meaning  beyond  question.  As 
now  put,  K'nies’s  demonstration  is  vp.T-y  Tnnp.b  amplified  (in  the 
first  edition  it  occupies  pp.  7 2 and  7 3 ; in  the  second  editiop, 
pp.  106  to  114h  but,  substantially.  I cannot  consitler  it  any 
more  satisfactory.  On  the  contrary,  it  seems  to  me  to  bring 
out  more  clearly  that  the  existence  of  this  durable  use,  which 
I disputed,  is  not  proved,  but  only  assumed. 

In  one  of  the  weightiest  of  the  new  passages  (p.  109), 
Knies  has  no  hesitation  in  explaining,  in  so  many  words,  that 
in  the  Loan,  although  “ not  the  same  individual  grains  of  corn 
and  pieces  of  money  are  returned,  but  (only)  an  equally  large 
and  equally  valuable  amount  of  grains  of  corn  and  pieces  of 
money,”  stiU,  “ to  economical  consideration,  the  same  goods  are 
given  back.”  Here  he  sanctions  the  fiction  of  identity  between 
fungible  goods,  in  optima  forma,  within  the  sphere  of  economical 
theory  and  economical  discussion.  AU  that  follows  he  bases 
on  the  foundation  thus  obtained.  He  finds  the  essence  of 
hire  and  lease  in  the  fact  that  here  “the  hirer,  leaseholder, 
etc.,  gets  the  land,  house,  or  the  like,  transferred  to  him  to 
use  for  his  own  purposes  for  such  and  such  a continuous 

1 See  Capital  and  Interest,  p.  239,  It  goes  without  saying  that  I could 
mean  nothing  else  than  an  involuntary  dialectical  confusion  in  the  writerls 
mind,  and  nothing  was  further  from  my  intention  than  to  charge  a scholar,  so 
much  esteemed  by  myself  and  by  all  the  world,  with  wilfully  misleading  his 
readers.  I should  have  thought  that  the  very  sincere  expressions,  in  that  and 
other  writings,  of  the  respect  in  which  I have  always  held  the  person  of  that 
past  master  of  our  science,  and  particularly  the  express  recognition  of  his 
“thorough  and  conscientious  efforts”  with  which  I introduced  this  very 
criticism  (p.  239),  might  have  sufficiently  protected  me  against  any  such  mis- 
conception. I was  therefore  more  than  astonished  to  learn  that  Professor 
Knies  had  taken  my  words  as  conveying  an  offensive  imputation  of  wilful 
misleading  of  his  readers.  Although  I scarcely  think  that  any  one  of  my  readers 
will  have  understood  me  in  this  sense,  I do  not  hesitate  to  explain  here, 
emphatically  and  publicly,  not  only  that  I had  not  the  slightest  intention  of  any 
offensive  imputation,  but  that  1 am  exceedingly  sorry  if  my  in  con  si  derate  choice 
of  words  should  unwittingly  have  made  such  an  interpretation  possible. 


CHAP.  I 


KNIES’S  CRITICISM 


289 


period,  at  the  expiry  of  which  he  has  to  give  back  the  good 
in  question.”  In  the  Loan,  perishable  goods  are  Likewise 
transferred  “ to  be  employed  by  the  borrower  for  such  and 
such  a continuous  but  limited  period  of  time.”  Consequently 
Hire  and  Loan  are,  essentially,  analogous  transactions — which 
was  the  point  to  be  proyed. 

To  this  I would  simply  answer,  that  the  second  premiss 
is  not  truth  but  poetry.  The  sober,  prosaic  truth  is  that, 
in  the  Loan,  perishable  goods  are  not  transferred  to  the 
borrovyer  “ for  a continuous  but  limited  period  of  time  ” ; they 
are  transferred  definitely  and  for  eyer : they  are  never  giyen 
Ifflck.  What  is  given  back  is,  in  fact,  other  goods.  WTiat 
now  becomes  of  the  inferred  analogy  ? 

I am  not  blind  to  the  use  of  analogies,  and  even  to  the 
demonstrative  force  which  analogies  may  have  under  certain 
circumstances.  I have  myself  often  used  them  in  the  course 
of  this  book  to  drive  home  an  argument.  But  an  analogy  is 
a^  weapon  which  requires  careful  handling.  Comparisons,  as 
every  one  knows,  are  always  imperfect ; if  the  compared  things 
have  one  side  in  common,  they  have  always  another  in  which 
they  differ.  The  “legal  person,”  for  instance,  may  very  well 
be  compared  with  the  physical  person  in  questions  relating  to 
property,  while,  in  questions  relating  to  the  family,  it  would 
scarcely  be  safe.  If,  then,  we  draw  some  conclusion  from  the 
similarity  of  two  things,  our  conclusion  must  keep  within  the 
sphere  in  which  the  similarity  actually  exists  ; from  similar 
circumstances  in  one  sphere  we  cannot  draw  a conclusion 
that  the  circumstances  are  similar  in  another  sphere  to  which 
the  similarity  does-  not  extend.  No  one,  for  instance,  would 
consider  an  argument  like  this  legitimate : — the  legal  person 
is  as  much  a person  as  the  physical  person ; a physical  person 
can  marry ; therefore,  a legal  person  also  can  marry ! 

Vc>t-.  if.  that  it  i.s  into  this  vicious  a,nd  false. 

use  of  analogies,  that  Knies  and  the  other  theorists  of  his, 
s^ool  have  fallen.  I grant  at  once  that,  in  a certain  point  of 
■view,  the  individual  goods  replaced  may  be  looked  upon  as  if 
they  actually  were  the  same  individual  goods  which  were 
given  away  in  the  loan : they  have  identically  the  same  effect 
on  the  pcouoTnical  position  of  the  lender  who  receives  them. 

Now,  so  far  as  the  ground  of  this  identification  extends,  so  far 


290 


THE  LOAN  AND  LOAN  INTEREST 


BOOK  VI 


also  is  one  justified  in  drawing  conclusions  from  it — but  no 
further.  The  analogical  conelusiuns  of  tlie  TTse  tliooristg^ 
however,  are  entirely  beyond  this  justifiable  sphere.  What 
lias  the  theoretical  question  whether,  in  perishable  goods,  a 
continuous  use  is  possible  or  not,  to  do  with  the  fact  that  it 
is  all  the  same,  as  regards  the  interests  of  the  lender,  whether 
he  gets  the  individual  goods  X or  the  indiAidual  goods  Y ? 
Nothing  at  all^ — -any  more  than  the  question  of  the  marriage- 
ableness  of  a legal  person  has  anything  in  common  with  the 
fact  that,  in  matters  relating  to  rights  of  property,  an  institu- 
tion or  a corporation  may  without  hesitation  be  conceived  of 
as  an  independent  “ person  ” ! Indeed,  if  the  reader  will 
excuse  a ridiculous  but,  as  I think,  a convincing  example,  one 
might  as  well  use  the  identity  of  funoible  goods  to  prove  that 

oysters  may  keep  fresh  for  ten  years : they  have  only  to  be 
lent  out  for  ten  years,  and  the  lender  receives  “ them  ” back 
still  fresh  oysters ! The  application  is  so  evident  that  I need 
scarcely  put  it  in  words.  The  identity  of  the  oysters  lent 
with  the  oysters  returned  is  no  true  identity,  but  only  an 
identity  assumed  ad  hoc.  So  far  as  concerns  the  practical 
interests  of  the  lender  the  identity  may  pass,  but,  as  a scientific 
c[uestion  of  fact,  like  the  physical  question  whether  oysters 
can  remain  fresh  for  ten  years,  there  is  no  identity  at  all. 
And  just  su’ch  a scientific  Question  of  fact  is  the  question 

whether,  in  perishable  goods,  there  is  a continuous  one  year’s 
or  ten  years’  use.  It  is  a question  that  must  find  its  answer 
in  considering  the  nature  of  the  perisliable  good  and  the 
nature  of  the  use ; properly  speaking,  not  the  shadow  of  an 
argument  can  be  got  from  the  fact  that  it  is  of  no  moment, 
as  regards  the  practical  interests  of  a person,  whether  he 
receives  the  particular  good  X or  the  particular  good  Y ! 

Now  Knies  does  make  the  attempt — and  this  is  a second 
and  indeed  the  weightiest  of  the  new  passages  in  this  edition — 
really  to  point  out  a durable  use  in  perishable  goods,  and 
to  give  some  indication  wherein  that  use  consists.  He  names, 
by  way  of  illustration,  “ the  maintenance  of  life,  and  of 
labour  power,  the  averting  of  a loss,  the  attainment  of  a 
business  return  or  profit”  (p.  112),  as  useful  effects  of  this 
sort,  which  the  borrower  “ may  obtain  and  make  for  himself 
from  the  consumption  (of  the  loaned  goods)  during  the  entire 


CHAP.  I 


JCN/ES’S  CRITICISM 


291 


period  of  time  before  the  similar  quantum  of  perishable  goods 
is  given  back.”  But  by  illustrations  like  this  Knies  again 
shows  that  he  is  on  the  wrong  track.  The  enjoyment  of 
effects  indirectly  obtained  from  the  consumption  of  goods  is 

not  in  the  least  a utility  which  we  get  in  addition  to  the 

consumption : it  is  just  the  utility  we  from  the  consump- 
tkm.  Accordingly  it  can  never  be  the  ground  of  a special 
equivalent  which  we  should  have  to  pay  over  in  addition  to 
the  equivalent  of  the  perishable  good  itself.  What  would  be 
said  of  a person  who  proposed  to  sell  a cwt.  of  corn  on  the 
following  terms ; — “ For  the  quarter  of  corn  itself,  that  is,  for 
all  the  useful  services  which  may  be  got  from  the  corn  by  its 
— sudden  or  gradual — consumption,  I want  thirty  shillings. 
But  for  the  lasting  indirect  use  of  the  corn — the  use  which 
consists  in  the  subsequent  enjoyment  of  useful  effects,  such 
as  life  prolonged,  labour  power  maintained,  and  so  on — I want 
another  shilling.”  Now,  if, — as  probably  no  one  will  deny.- — 
in  sdlinq  grain,  it  is  not  possible  to  conceive  of  the  subsequent 

enjoyment  as  the  ground  of  a special  equivalent ; if  the 
subsequent  enjoyment  is  obviously  included  in  the  purchase 
prihe  of  the  good  transferred  into  the  buyer’s  possession  ; it  is 
inconceivable  that,  all  at  once,  in  the  case  of  the  loan  (where, 
too,  the  quarter  of  corn  passes  into  the  full  possession  of  the 
borrower,  and  justifies  him  in  drawing  all  the  uses  he  can 
from  it),  every  indirect  use  is  to  be  separately  paid  for.  And 
why,  again,  should  this  indirect  use  be  paid  for  only  during 
one,  five,  ten  years,  or  for  so  long  as  the  loan  runs  ? Is 
the  utility  of  sustained  life  not  enjoyed  so  long  as  life  lasts  ? 
Is  the  utility  of  preserved  labour  power  not  one  which  lasts 
so  long  as  we  can  work  ? 

In  Capital  and  Interest  I had  so  thoroughly  and,  in  my 
own  opinion  at  least,  so  clearly  laid  down  the  facts  about  the 
lasting  “ indirect  use.”  and  shown  the  impossibility  of  its  being 
the  ground  of  loan  interest,^  that  I really  did  not  expect  to 
see  the  thing  emerge  once  more  as  stay  and  support  of  the 
Use  theory.  Least  of  all  did  I expect  it  from  a writer  who 
knew  what  I had  said  on  the  subject,  and  that  without  a single 
word  of  explanation  being  vouchsafed  in  answer  to  the  objec- 
tions I had  raised  meantime.  I cannot  but  express  my 
1 P.  229,  and  pp.  235-239. 


292 


THE  LOAN  AND  LOAN  INTEREST 


BOOK  VI 


regret — not  indeed  for  personal  reasons,  but  in  the  interest  of 
our  science — that  Knies  has  taken  so  little  notice  of,  and 
given  such  meagre  answers  to  the  theoretical  considerations 
which  I brought  against  the  Use  theory.  He  replies  on  nrip 
single  point,  and  that  a point  which,  however  important  it 
may  be  in  itself,  has  only  the  importance  of  an  incident  in  the 
struggle  that  is  to  decide  the  victory  or  defeat  of  the  Use 
theory;  while,  to  the  multitude  of  really  cogent  considerations 
directed  against  that  theory  as  a whole, — considerations  which, 
quite  apart  from  the  issue  of  this  incidental  question,  show  it 
to  be  internally  contradictory  ^ and  theoretically  inadmis- 
sible,^— dm  has.  nnfnrtimately.-fQnnd  no  word  of  rejoimler. 
Once  submitted  for  discussion  these  considerations  must  be 
met,  and  certainly  no  one  was  more  called  on  to  speak  in  the 
defence  of  his  own  Use  theory  than  was  Knies.® 

Hitherto  the  discussion  has  been  limited  to  attack  and 
defence  of  the  Loan  theory  of  other  economists.  I have  now 
to  reply  to  an  attack  made  on  my  own  theory.  The  dis- 
tinguished writer  we  have  just  been  discussing  has  now 
repeated  the  objection  he  urged  some  years  ago  against  mv 
concention  of  the  loan  as  a true  exchange ; it  is,  he  says,  in 
contradiction  of  the  hitherto  estatilished  conception  of  what 
an  exchange  is.  “ For  an  exchange — as  we  are  not  taking 
into  account  senseless  and  frivolous  actions — takes  place  only 

1 Capital  and  Interest,  pp.  228,  247. 

® Ibid.  p.  264. 

* The  criticism  which  Knies  directs  against  me  in  the  note  to  page  106  of  his 
second  edition  is  limited  unfortunately  to  a few  passing  remarks  on  points  which 
are,  for  the  most  part,  of  secondary  importance.  Moreover,  several  errors  of  fact 
have  slipped  into  these,  and  two  of  them  I cannot  let  pass  unchallenged.  First, 
I cannot  admit  that  I have  done  what  Knies  ascribes  to  me,  and  explained  that 
the  replaceableness  of  goods — that  is  to  say,  the  fact  that  one  sample  of  a class 
can  be  adequately  replaced  and  represented  by  another — is  simply  a legal  fiction. 
T only  sa.id  that  the  acltml  identity  of  replaceable  goods  was  a legal  fiction 

( Capital  and  Interest,  p.  253) ; and  these  are  two  very  different  statements. 
And,  further,  in  my  book  I do  not  regard  it  as  certain  that,  if  a person  speaks  of 
uses  in  respect  to  perishable  goods,  he  ought  to  point  out,  and  wishes  to  point 
out,  exactly  the  same  kind  of  process  of  use  as  is  to  be  observed  in  non-perishable 
goods.  On  the  contrary,  my  entire  criticism  of  Say  and  Schafiie  (p.  232), 
of  Hermann  and  even  of  Knies  himself  (p.  .233),  rests  on  the  idea  that  it  was  a 
matter  for  the  opposed  theory  to  point  out  the  existence  of  a something  otherwise 

f-nnctUiitarl  tVnn  fVip  material  services,  and  tba^'-  it  KaA-nat.  succeedeii  iji 

this  attempt. 


CHAP.  I KNIES’S  CONCEPTION  OF  EXCHANGE 


293 


when  goods  different  in  some  way  or  other  are  bartered.  But 
fimgible  goods,  sixch  as  grain  of  similar  kind  and  quality,  are, 
economically,  recognised  as  entirely  similar  goods.”  ^ 

I mnst  say  that  this  statement  seems  to  me  to  beg  the 

whole  questioq.  Instead  of  inquiring  what  the  connotation  of 
the  conception  of  exchange  is,  and  arguing  from  that  whether 
the  loan  can  be  called  a true  exchange  or  not,  Knies  starts 
with  a preconcei'ved  conception  of  exchange,  and  that  an 
arbitrarily  and  unnaturally  limited  conception.  As  a fact, 
Knies’s  limitation  of  the  conception  of  exchange  to  the  barter 
of  goods  of  different  kinds  is  one  we  do  not  find  in  the  nature 
of  exchange,  nor  does  it  correspond  with  the  “ hitherto 
, estabhshed  ” xxse  of  the  conception.  In  the  nature  of  exchange 
what  is  involved  is  that  two  goods  are  given,  the  one  for  the 

other — nothing  more ; as  to  “ established  usage,”  it  is  very  easy 
7 to  show  that  transactions  in  which  entirely  similar  fungible 
goods  are  bartered  for  one  another  are  considered  by  all  the 
world  true  exchanges,  and  are  called  so.  In  proof  of  this  I 
might  point  out  that  two  people,  simply  from  whim  or  fancy, 
will  “ exchange  ” two  fungible  goods,  the  one  for  the  other, 
two  new  copies  of  the  same  book.  Knies  guards  hhnself, 
indeed,  against  this  argument  by  saying  that  “ we  are  not 
taking  into  account  frivolous  and  senseless  actions,”  but  this 
is  making  too  light  of  the  matter.  For,  certainly,  it  cannot 
be  denied  that  such  capricious  actions  may  happen,  and  occa- 
sionally do  happen,  and  it  cannot  very  well  be  denied  that 
such  transactions,  when  they  do  happen,  are  neither  Hire  nor 
Loan,  nor  anything  else  than  true  Exchange. 

But  there  is  no  need  to  appeal  to  rare  cases  like  these. 
Th&pe  is  one  group  of  instances  where  men,  quite  deliberately 
and  on  entirely  rational  economic  grounds,  do  barter  ftimilar 

fungible  goods : that  is  where  goods,  otherwise  perfectly 
similar,  are  available  under  different  modalities — to  use  a 
philosophic  term — as,  for  instance,  in  different  places.  Take 
the  ease  of  a farmer  A,  who  owns  a plantation  of  trees  two 
hours’  journey  away  from  his  farm,  while  there  is  a plantation 
belonging  to  his  neighbour  B immediately  beside  him.-  In 
both  plantations,  the  wood,  cut  or  ready  for  cutting,  is  of 

^ Der  Kredit,  part  i.,  Berlin,  1876,  p.  10:  shortly  repeated  without  new 
arguments  in  the  second  edition  of  the  book  Bas  Geld,  p.  106,  note  1. 


294 


THE  LOAN  AND  LOAN  INTEREST 


BOOK  VI 


exactly  the  same  quality.  Now,  evidently,  it  is  more  convenient 
and  more  profitable  for  A to  have  ten  loads  of  wood  near  his 
house  than  ten  loads  ten  miles  away  from  it.  It  will,  there- 
fore, be  considered  quite  reasonable,  and  quite  intelligible,  to 
propose  that  B should  make  over  to  A ten  loads  from  the 
near  plantation,  in  return  for  which  A will  give  B ten  loads, — 
or  perhaps  twelve  loads,  including  a premium — of  the  similar 
wood  from  his  far-awav  plantation.  And  if  this  is  agreed  to, 
everybody  would  pronounce  it  a real  and  true  exchange. 

Or  can  we  imagine  anybody,  from  the  fiction  of  identity 
between  fungible  goods,  drawing  an  analogical  conclusion  like 
the  following  about  the  nature  of  the  transaction  : — “ A makes 
over  to  B ten  loads  of  wood  at  a spot  ten  miles  away  from 
his  house,  and  receives  from  B ten  loads  of  wood  here  at  his 
house.  It  is  all  the  same  to  A whether  he  receives  back  the 
same  ten  loads  or  ten  other  loads.  ‘From  an  economic  point 
of  view,’  therefore,  it  is  essentially  the  same  ten  loads  which  he 
receives  back,  only  at  a different  place.  The  essential  nature 
of  the  transaction  is,  accordingly,  not  an  exchange — since  no 
exchange  takes  place  between  similar  goods — but  a transfer  of 
the  same  goods  to  a different  point  in  space, — that  is  to  say,  a 
freight  transaction.  And  if,  for  the  advantage  which  hes  in  this 
transfer  from  one  place  to  another,  A pays  B a premium  of 
two  loads,  the  payment  is  essentially,  from  an  economic  point 
of  view,  an  expense  of  carriage.”  I very  much  doubt  whether 
anybody  would  foUow  him  in  this  conclusion  from  analogy, 
although  it  is,  feature  for  feature,  the  same  as  the  one  above. 
We  should  rather  have  expected  that  Knies  would  have  been 
ready  to  own  that  the  exchange  of  two  amounts  of  wood, 
alike  in  every  respect  except  that  they  are  available  in 
different  places,  was  a real  and  true  exchange.^ 

And  now  I ask : If  it  falls  within  the  limits  of  the 
conception  of  exchange  when  goods  present  in  one  place  are 
bartered  for  goods  entirely  similar  but  present  in  another 
place,  with  what  right  can  we -exclude  from  the -Conception 
tbp.  nasp.  where  goods  present  at  one  time  arp  ba.rtp.rp.d  for 

^ I may  note  that  it  would  be  easy  to  multiply  examples  in  which  the  same 
state  of  things  occurs.  Grain  merchants,  c.g.,  may  find  it  to  their  advantage  to 
exchange  stocks  held  in  dififerent  stores ; bankers,  to  exchange  sums  of  money 
disposable  at  diflTerent  places,  etc. 


CHAP.  I 


FALLACY  OF  THE  ENDURING  USE 


295 


goods  entirely  similar,  but  present  at  another  timp.  ? When 
so  much  has  been  made  of  analogies  in  the  whole  course  of 
this  controversy,  why  exclude  the  one  analogy  which  is, 
most  evidently,  the  appropriate  one  ? Tf  the  difference  of  the 
place  at  which  goods  are  available  is  a sound  economie  reasmi 
for  exchanging  fungible  goods  that  are  in  other  respects 
entirely  similar,  and  if  the  advantage  and  convenience  of  the 
present  place  may  justify  the  claim  and  allowance  of  a premium, 
just  as  much  may  the  differpupp  of  the  time  at  which  similav 
goods  are  available  be  a sound  reason  for  their  exchange,  and 
a guarantee  that  there  will  be  a.  premium  on  the — more 
valuable — present  goods.  This  premium,  and  nothing  else,  is 
Interest. 

A great  tree  does  not  fall  at  one  blow.  And  I cannot 
expect  that  a loan  theory,  which  has  dominated  human  intel- 
lects for  centuries,  shoidd  fall  at  the  first  attack.  But  I 
venture  to  hope  that  I have  at  least  awaked  a general  feeling 
that  it  is  necessary  to  submit  the  principles  of  that  theory  to 
critical  revision.  There  is  one  task  which  the  next  economist 
who  proposes  to  maintain  the  Hermann-Knies  loan  theory  will 
not,  I imagine,  venture  to  omit ; namely,  once  and  for  all,  to. 
point  out  positively  the  existence  of  that  “ enduring  use  ” of 

perishable  goods,  distinct  from  their  consumption,  for  which, 

interest  is  supposed  to  be  paid,  and  to  say,  clearly  and  dis- 
tinctly, wherein  that  use  peculiarly  consists.  Up  tiU  now  its 
defenders  have  acted  in  a somewhat  curious  way ; they  have 
pointed  out,  by  more  or  less  questionable  analogies,  that,  in 
the  loan;  a temporary  use  is  transferred,  and  concluded  from 
this  that  there  must  be  such  a use ; the  consequence  being 
that — with  the  exception  of  this  last  unfortunate  attempt  of 
Knies’s — the  nature  of  the  use,  its  contents  and  so  on,  were 
left  entirely  in  the  background.  I consider  that  our  science 
has  a right  to  demand  the  opposite  and  the  natural  method  of 
demonstration.  Let  it  first  be  shown  that  there  is  sp^.b  a.  nse, 
and  wherein  it  consists  : if  that  can  be  done,  we  shall  willingly 
believe  that  it  is  transferred  in  the  loan.  If  that  cannot  be 
done — and  I doubt  very  much  if  it  can — then  I shall  have 
the  greater  confidence  in  pointing  to  my  solution  of  the 
question.  To  the  latter,  at  any  rate,  I have  no  fear  that 
the  stigma  of  sophistry  and  unnaturalness  can  be  attached. 


296 


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BOOK  VI 


Passing  from  this  polemical  digression — which  I considered 
only  due,  as  well  to  the  importance  of  the  subject  under 
dispute,  as  to  the  scientific  standing  of  my  esteemed  opponent, 
— let  us  return  to  the  main  subject.  According  to  our  con- 
ception interest  is  a complementary  part  of  the  price  payable 
for  a sum  of  present  goods  in  future  goo^.  It  is  a part- 
equivalent  of  the  “ principal  ” lent.  In  itself  there  would  be 
nothing  to  prevent  this  part-equivalent  being  paid  along  with 
the  bulk  of  the  price  ; in  other  words,  interest  and  “ principal  ” 
might  be  put  together  in  one  single  payment  s,t  the  end  of 
the  whole  loan  transaction.  Reasons  of  practical  convenience 
have,  however,  made  it  the  general  rule  that,  jn  loans  made 
for  any  considerable  length  of  time,  the  premium  should  be  paid 
separately,  and  in  rates  graduated  according  to  time, — monthly, 
half-yearly,  yearly,  etc.  With  the  essential  nature  of  interest 
this  method  of  payment  has  nothing  to  do ; it  may,  indeed,  be 
expressly  provided  otherwise  by  the  loan  contract.  But  quite 
possibly  it  is  the  case  that  this  custom,  which,  practically,  has^ 
prevailed  from  time  immemorial,  of  separating  the  payment 
of  interest  from  the  payment  of  principal,  has  assisted — perhaps, 

even,  directly  caused the  popular  opinion  tbnt  the  prinr.ipa.1 

sum  paid  back  is.  by  itself,  the  equivalent  of  the  sum  originally 
given,  and  that  interest  is  a thing  by  itself,  an  equivalent  for 
another  and  separate  something. 

Now  and  then  a loan  may  be  granted  without  interest ; 
but  the  reason  of  this  is  seldom  or  never  that  the  market  price 
of  present  goods,  as  against  future  goods,  is  so  favourable  to 
the  latter,  that,  in  the  general  loan  market,  they  can  purchase 
an  equal  amount  of  present  goods  without  premium.  Almost 
invariably  these  are  cases  where  the  lender  dispenses  with  the 
payment  of  premium  on  some  special  personal  ground,  such  as 
friendship,  charity,  humanity,  class  obligation,  and  so  on.  It 
has  been  usual  to  conceive  of  the  loan  without  interest  as  a 
gift  of  the  temporary  “ use  ” of  the  thing  lent.^  Our  theory, 
of  course,  demands  another  conception.  We  put  this  kind  of 
loan  simply  among  cases  where  a man,  from  some  personal 

Tuntivp,  parts  with  hi.s  p.ommodityL  under  the— market  price. 
We  say  it  is  the  same  thing  as  where  a manufacturer  gives 

1 “A  loan  without  interest  is  a gift  of  the  use  of  so  much  capital,”  Roscher, 
Grundlagen,  § 189. 


CHAP.  I 


INTEREST  A PART  OF  PRICE 


297 


personal  friends  at  the  cost  price,  say,  of  4s.  the  article  wnich 
he  can  sell  anywhere  at  the  general  market  price  of  5 s. 

Lastly,  it  very  seldom  occurs,  and  then  neyer  as  regards 
present  and  future  goods  in  general,  but  only  as  regards  one 
particular  kind  of  goods,  that  the  relations  of  supply  and 
demand  are  such,  that  future  goods  obtain  a higher  price  than 
pre.^^ent  gnnd.s  of  the  same  kind,  and  that  a premium  in  present 
goods  must  be  paid  for  future  goods.  It  will  only  happen  in 
cases  where,  presumably,  the  relations  of  supply  and  demand 
in  the  future  will  be  essentially  more  unfayourable  than  in 
the  present,  and  where,  at  the  same  time,  for  personal  or 
technical  reasons,  it  is  not  possible  to  preserye  the  present  ample 
stocks  till  that  future  point  of  time  when  they  are  assured 
of  a higher  yalue.^  Suppose  the  case  of  a brewer  whose  ice- 
cellars  are  too  small  for  his  requirements.  If  in  January  he 
puts  in  as  much  ice  as  the  cellars  will  hold,  and  has  still  two 
hundred  carts  of  ice_oyer,  he  may  be  yery  willing  to  exchange 
these  for  one  hundred  carts  of  ice  deliyerable  in  August.^  But 
the  possibility  of  such  a case  seems  to  me  rather  to  afford  a.  nnt 
insignificant  proof  of  my  loan  theory.  For,  I should  like  to  ask, 
how  would  the  Use  theorists  explain  this  ? As  a transfer  of 
use  like  the  loan ; only  that  the  use  has  a negative  yalue. 
and  that  the  borrower,  instead  of  paying  a premium,  dema,nds 
a premium?  Or,  perhaps,  as  a storage  transaction,  the  difference 
between  the  quantity  giyen  and  that  receiyed  being  considered 
a fee  for  safe  deposit  ? 

I think  both  interpretations  are  so  clearly  artificial  and 
fictitious  that  yery  few  people  would  seriously  entertain  them. 
Probably  the  Use ' theorists  would  be  qmte  willing  to  admit 
this  as  a case  of  real  exchange ; but,  so  far  as  they  did  so, 
they  would  be  untrue  to  their  own  contention,  according  to 
which  exchange  is  only  possible  between  goods  of  different 
kinds,  and  not  between  fungible  goods  of  the  same  kind. 
Our  theory,  on  the  other  hand,  explains  eyerything  naturally. 

and—hy  one  formula.  Without  forcing  an  interpretation,  it 
can  recognise  that,  here,  the  position  is  exactly  the  same 
as  in  the  loan.  There  is  a mutual  transfer  of  property 

^ See  above,  p.  251. 

- Similar  cases  may  perhaps  occur  after  very  abundant  harvests,  where  the 
producers  have  not  enough  storage  accommodation  to  secure  the  surplus. 


298 


THE  LOAN  AND  LOAN  INTEREST 


BOOK  VI 


in  two  sums  of  goods,  which  are  entirely  similar  in  every 
other  respect  but  that  of  being  disposable  at  different  points 
of  time.  And  to  this  entirely  similar  state  of  matters  it  gives 
an  entirely  similar  explanation : that,  in  both  categories,  there 
is  an  exchange  between  present  and  future  goods,  the  prices  of 
PTP  t.hp  rpan1f.^nt.  £>f  the  Subjective  valuations  put  upon 
these  two-jclasses  of  goods  within  the  market. 


CHAPTEE  II 


THE  PROFIT  OF  CAPITALIST  UNDERTAKING.  PRINCIPLES 
OF  EXPLANATION 

We  come  now  to  the  principal  form  assumed  by  the  interest 

problem.  Among  the  phenomena  of  interest  it  is  the  one 
which  has,  practically,  been  of  most  importance.  Usually, 
indeed,  it  passes  for  the  spring  and  source  from  which  all  the 
others  are  derived.  And  it  has  chiefly  been  the  attempt  to 
explain  this  form  of  interest  that  has  led  to  the  terribly 
involved  war  of  opinions  which  gave  only  too  ample  material 
for  my  Capital  and  Interest. 

A word  or  two  will  indicate  generally  the  peculiar  kmd  of 

activity  which  the  undertakers  exert,  and  from  which  they 
draw  their  profit.  They  buv  goods  of  remoter  rank,  such  as 
raw  materials,  tools,  machines,  the  use  of  land,  and,  above  all, 
labour,  and,  by  the  various  processes  of  production,  transform 
them  into  goods  of  flrst  rank,  finished  products  ready  for  con- 

sumption. In  doing  so  they  obtain — independently  of  com- 
pensation for  their  own  personal  co-operation  in  the  work  of 
production  as  leaders  of  industry,  head-workers,  etc. — a gain 
approximately  proportioned  to  the  amount  of  capital  invested 
in  their  business.  This  gain  is  called  by  some  “Uatural  Interest 
on  Capital”  or  “Profit,”  and,  by  others,  “Surplus  Value.” 
How  is  this  gain  to  be  explained  ? 

I must  introduce  the  explanation  by  estabhshing  one 
important  fact.  Goods  of  remoter  rank,  although,  materially. 
present  commodities,  are,  economically,  future  commodities. 

As  present  commodities  they  are  incapable  of  satisfying 
human  want ; they  require  first  to  be  changed  into  consump- 
tion goods;  and  since  thisAprocess,  naturally,  takes  time,  they 


300  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


can  only  render  their  services  to  the  wants  of  a future  period. 

— at  the  earliest,  that  period  distant  by  the  time  which  the 
productive  process  necessarily  takes  to  change  them  into 
consumption  goods.  A group  of  productive  instruments,  such 
as  Seed,  Manure,  Agricultural  Implements,  Labour,  etc.,  which 
cannot  he  transformed  into  the  finished  product  Grain  under 
a year’s  process,  can_  only  serve  for  the  satisfaction  of  next 
year’s  subsistence  wants.  In  this  respect,  then,  goods  of 
remoter  rank  available  in  the  present  (present  productive 
goods)  are  similar  to  future  consumption  goods ; their  utility 
is  a future  utility ; they  are  “ future  commodities.” 

It  is  evident  that  this  fact  cannot  be  without  some  far- 
reaching  influence  on  the  value  which  such  goods  obtain.  As 
we  know,  we  value  goods  of  remoter  rank,  in  general,  accord- 
ing to  the  marginal  utility  and  value  of  their  finished  a,nd  final 
products.  The  group  of  productive  instruments  from  which  we 
get  one  hundred  bushels  of  corn,  has  exactly  the  same  import- 
ance for  the  satisfaction  of  our  wants  as  the  hundred  bushels 
of  corn  into  which  it  is  transformed.  But  these  hundred 
bushels,  the  value  of  which  is  the  standard  for  the  value  of 
the  productive  group,  are  still,  for  the  time,  a hundred  ftdiire 
bushels,  and,  as  we  saw  in  previous  chapters,  future  goods  are 
worth  less  than  present  goods.  A hundred  future  bushels  are, 
therefore,  worth,  we  may  say,  only  as  much  as  ninety-five 
present  ones.  From  this  it.  follows  that  Means  of  Eroduction^ 
also,  if  estimated  against  'present  aoo(h,  are  fm]  ud  ^f 
than  the  amount  of  finished,  and-final  products^which  can  be 
made  out  of  them.  Our  group  of  productive  instruments 
which,  in  a year’s  time,  will  furnish  us' one  hundred  quarters 
of  grain,  is  equal  in  value  to  one  hundred  quarters  of  next 
year’s  grain ; but,  like  that  grain,  is  equal  to,  say,  only  ninety- 
five  quarters  of  this  year’s  grain.  Or,  if  we  translate  the 
whole  matter  into  terms  of  money  economy,  and  assume  that, 
next  year,  the  quarter  of  corn  will  be  worth  twenty  shillings, 
then  our  group  of  productivejiiateriala.  wherewith  we  Jiold  in 
our  hands  the  condition  of  our  obtaining  a money  return  of 
£100  next  year,  is  equal  in  value  to  £100  nexlLJg&ar.  MLIO-OQ 
more  than  £95  now.  If,  then,  we  buy  or  exchange  these  means 
of  production  now,  the  purchase  price,  naturally,  is  measured 
in  present  money,  and  we  buy  them  for  a smaller  number 


CHAP  II 


PRINCIPLES  OF  EX  PLANA  TION 


301 


of  pounds  sterling  than  they  will  bring  their  owner  in  the 
future. 

This,  and  nothing  else,  is  the  foundation  of  the  so-called 
“ cheap”  hiiying  of  prndiietivp.  instriiment.s,  and  especially  of 
labour,  which  the  Sociahsts  rightly  explain  as  the  source  of 
jn’ofit  on  capital,  but  wrongly  interpret,  in  round  terms,  as  the 
result  of  a robbery  or  exploitation  of  the  working  classes  by 
the  propertied  classes.  The  buying  is  not  so  cheap  as  it  seems. 
The  appearance  of  cheapness  comes,  for  the  most  part,  from 
this ; that  the  price  is  measured  by  a different  standard  from 
the  commodity ; measured,  as  it  were,  by  one  of  these  cheap 
measuring  tapes  which  stretch  with  wear  and  indicate  a foot 
^ by  ^ niches.  The  means  of  production,  and  their  result. — 
X the  finished  product  towards  wliich  the  buyer  is  looking  in 
purchasing  them, — are  future  commodities,  and  the  pn'ce  i.s 
measured  and  paid  in  (more  valuable)  present  goods.  That, 
in  this  case,  the  greater  number  of  less  valuable  future  goods 
is  purchased  by  a smaller  number  of  more  valuable  present 
goods,  is  not  “ cheap  buying,”  any  more  than  it  would  be  cheap 
to  acquire  one  hundred  florins  of  fifty  florin  standard  for  nmety 
pieces  of  forty-five  florin  standard.  The  circumstances  of 
possession  are  only  to  a very  limited  extent  responsible  for  the 
fact,  that  the  future  commodity  which  the  lahouxers— have  Tq 
sell  (their  labour),  is  less  valuable  than  the  present  goods 

which  the  capitalists  have  to  offer  fwagesl  For  the  most 
part,  it  is  elementary  facts  of  human  nature  and  the  technique 
of  production  that  are  to  blame : facts  which  we  have  gone 
into  in  detail  in  the  foregoing  book.  The  social  importance 
of  the  phenomenon  of  interest,  however,  will  take  up  our 
attention  later  on ; in  the  meantime  I have  only  to  explam 
what  Interest  is.  and  why  it  is. 

Knowing  now  that  the  undertaker  buys  the  future  com- 
modity, “Means  of  Production,”  for  a smaller  number  of 
pieces  of  present  goods  than  the  number  of  pieces  which 
will  compose  their  future  product,  we  ask.  How  does  he 
come  by  his  profit  ? The  answer  is  very  simple.  From 
his  “ cheap  ” purchase,  indeed,  he  does  not  get  any  result ; 
for,  estimated  by  its  present  value,  the  commodity  is  dear.^ 


^ Of  course  it  may  happen  in  individual  cases,  that,  outside  of  the  reasons  for 
apparently  cheap  buying  discussed  in  the  text,  there  may  be  other  reasons  for. 


302  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


The  profit  comes  first  into  existence  in  his  hand.  It  is  during 
the  progress  of  production  that  the  future  commodity  ripens 

graduaUv  into  the  present  commodity,  and  grows  at  the  same 
time  to  the  full  value  of  the  present  commodity.  Time 
elapses ; what  was  next  year  becomes  this  year  ; and  on  the 
great  changing  stage  of  life  everything — man  himself,  his  wants 
and  wishes,  and  with  them  the  standard  by  which  he  measures 
his  goods — shifts  one  scene  forward.  The  wants  which,  last 
Year,  were  future  wants,  and  little  thought  of  as  suchu_attain 
their  full  strength  and  their  full  right  of  present  wants ; and 
a similar  advance  attends  the  goods  which  supply  these  wants. 
A 'year  ago  they  were  goods  of  the  future,  and  had  to  be 
content  with  the  lower  value  that  attached  to  them  as  such : 
to-day  they  are  present  goods,  ripe  for  consumption,  and  enjoy 

the  full  value  of  such  goods.  A year  ago  it  was  to  their  preju- 
dice that  they  were  measured  in  the,  then,  “ present  ” goods. 
To-day  that  standard  has  sunk  into  the  past,  and  if  the  men  of 
to-day  measure  them  again  in  “ present  ” goods,  they  stand  equal 
with  them  in  the  first  and  chief est  rank,  and  suffer  nothing  by 
the  comparison.  Tn  short,  as  time  passes  it  cancels  the  causes 
by  reason  of  which  the  then  future  commodity  suffered  a 

shrinkage  of  value,  and  brings  it  up  to  the  full  value  of  the 
present  good.  The  increment  of  value  is  the  profit  of  capital. 

This  is  not  to  say,  of  course,  that,  to  make  present  goods 
out  of  future  goods,  it  is  sufficient  that  time  should  elapse  and 
the  future  become  the  present.  The  goods  themselves  must^ 
not  remain  stationary.  On  their  part  they  must  bridge  over 
the  gap  which  divides  them  from  the  present,  and  this  they 
do  through  the  production  which  changes  them  from  goods  of 
remote  rank  into  finished  and  final  products.  If  there  is  no 
productioiL  process,  if , the  capital  is  left  dead,  the  means  of 

really  abnormal  cheat)  bitving  : as,  e.g.,  skilful  utilisiug  of  favourable  conjunct- 
ures, usurious  oppression  of  the  seller,  and,  in  particular,  of  the  labourer.  The 
emergence  of  such  factors  in  this  case  results  in  a still  further  limitation  of  the 
purchase  price,  and  in  the  obtaining  of  an  extra  profit.  This  extra  profit  is  to  be 
distinguished  from Jiormal  pro tit^Qn__capita^l_injyery  respechi  in  its  nature — for  it 
is  not  a true  profit  on  capital  but  strictly  a profit  of  the  undertaker  ; iujts 
theoretical  e^lanation — for  it  owes  its  origin  to  other  and  quite  special  causes  : 
and,  finally,  in  the  social  and  political  judgment  we  must  form  of  it.  I need 
scarcely  say  in  so  many  words  that  what  is  said  in  the  text  has  only  to  do  with 
profit  on  capital  pure  and  simple. 


CHAP,  il 


PRINCIPLES  OF  EXPLANATION 


303 


pvodHotiou  always  remain  undervalued  future  goods.  In  the 
year  1888,  a group  of  means  of  production  which  can  be 
changed  into  a finished  product  in  a year’s  process, — that  is 
to  say,  by  1889, — is  one  year  away  from  satisfying  the  wants 
of  the  present.  If  this  group  is  left  unused  till  1889,  its 
product,  of  course,  cannot  now  be  obtained  till  1890  at  the 
earliest,  and  it  remains,  as  before,  one  year  away  from  satisfy- 
ing the  wants  of  the  present ; its  value  has  no  opportunity  to 
expand,  and  suffers  the  common  fate  of  “ dead  ca,pital-” ; it 

bears  no  surplus  value,  and  no  interest. 

This  is  the  truth  about  Undertakers’  Profit,  and  I trust 
it  will  be  found  simple  enough.  The  Socialists  are  fond 
of  caUing  this  profit  “ surplus  value.”  The  name  is  more 
applicable  than  they  have  any  idea  of.  It  is,  literally,  a profit 
from  the  increment  of  value  of  the  future  commodity  transmuted, 
in  the  hand  of  the  undertakers,  into  a finished  present  good. 


CHAPTER  III 


THE  PROFIT  OF  CAPITALIST  UNDERTAKING.  COMPLICATIONS 

The  principle  laid  down  in  last  chapter  is  simple,  but  Jn 
practical  life  it  is.  as  usual,  obscured  by  a multitude  of  casuist- 

ical details  and  developments.  These  do  not,  indeed,  prevent 
its  operation,  but  they  conceal  it  under  various  phenomenal 
forms  such  as  make  recognition  of  it  not  always  easy.  Some 
of  these  developments  we  must  take  up,  and  we  shall  begin 
with  one  of  the  simplest. 

The  contraction  of  value,  from  which,  in  our  estimation, 
future  goods  suffer,  is,  as  we  know,  by  no  means  uniform  for 
all  future  goods.  It  is  graduated  according  to  the  time  which 
intervenes  between  the  present  and  the  date  at  which  the 

goods  are  ready  for  use.  £100,  for  iiistanee,  which  will  be 
available  in  a year’s  time,  will  be  valued  at,  perhaps,  something 
like  £95  in  present  money;  £100  available  in  a couple  of 
years,  at  £90;  £100  available  three  years  hence  at  £85,  and 
so  on.^  To  this  graduated  contraction  of  value  corresponds  a 
steady  graduated  increase  in  value  of  those  goods  wliich  are-ln- 
process  of  ripening  into  present  goods.  A group  of  instruments 
which,  at  the  end  of  a three  years’  production  process,  promises 
a product  of  the  value  of  £100,  and,  in  virtue  of  that  promise, 
is  valued  at  £85  at  the  beginning  of  the  process,  does  not 
remain  stationary  at  the  value  of  £85  till  the  moment  when 
the  production  is  completed,  and  then  make  one  bound  up  to 
its  full  present  value  of  £100.  Its  value  increases  gradually 
as  the  time  passes  which  divides  the  group  from  maturity,  and 
the  production  process  nears  its  completion.  This  circumstance 

1 Not  quite  exactly ; for  easier  understanding  the  figures  in  the  text  are 
calculated  roughly,  and  without  consideration  of  compound  interest. 


CHAP.  Ill 


COMP  Lie  A TIONS 


305 


is  of  great  practical  importance.  Under  the  division  of 
labour,  scarcely  anv  kind  of  production  is  carried  through; 


The 


from  beginning  to  ( 


separate  stages  of  production  become  branches  of  production, 
visibly  independent,  and  conducted  by  separate  undertakers. 

t.hp  valnp  tbng  increases  bv  stggpg,  « pnrrpgpnTir^iT^o  gain 
accrues,  as  profit  on  capital,  not  only  to  the  last  undertaker. — 

the  one  in  whose  hand  the  good  becomes  an  actual  present 
commodity, — but  to  eachjof-the  undertakers,  even  to  one  who 
has  brought  the  product  only  a single  step  nearer  maturity. 

A very  cornmnn^cemplication  arises  from  the  fact  that 
productive  goods  contribute  jrarious  portions  of  their  useful 
content  to  the  making  of  various  final  products,  which  products. 
arrive  at  maturity  at  various  points  of  time.  This  is  the  case 
with  aU  durable  productive  goods.  A plough,  for  instance, 
which  lasts  twenty  years,  will  contribute  a twentieth  part  of  its 
Life-work  and  use  to  the  ingathering  of  twenty  different  harvests. 
Corresponding  with  this  twofold  property — that  of  being 
means  of  production,  and  at  the  same  time  durable  goods — such 
goods,  both  in  the  formation  and  in  the  increase  of  their  value, 
manifest  a peculiar  combination  of  phenomena ; they  unite  the 
phenomena  already  known  to  us  as  characteristic  of  ‘productim 
goods  with  certain  other  special- phenomena  which  accom- 
pany all  durMe  goods — even  those  that  are  not  devoted  to 
productive  purposes.  We  have,  however,  to  deal  particularly 
with  this  latter  class  of  phenomena  in  a later  chapter,  and 
accordingly  we  must  postpone  the  full  explanation  of  this 
complication  until  then. 

Another  complicii.tinn  arises  from  the  fact,  that  almost  all 

productive  instmrnents  ad-mif-,  of  wn'nns  kinds  of  employment. 
and  that  these  employments  turn  out  their  finished  products 
at  different  points  of  time.^  The  same  fuel,  for  instance,  may 
be  employed  in  cooking  a meal,  or  in  keeping  up  a smithy  fire 
where  the  tools  are  made  for  boring  a coal  seam.  In  the 

^ The  analysis  which  follows  is  devoted  to  the  circumnavigation  of  one  of  those 

hidden  rocks  which,  I suspect,  might  rise  suddenly  in  the  way  of  those  readers 
who  venture  on  their  own  account  to  go  further  into  the  circle  of  ideas  here 
opened  up.  The  digression  which  it  necessitates  forms  one  of  the  numerous 
sacrifices  of  time  which  I imagine  myself  compelled  to  make  with  a view  to  the 
safety  of  my  theory,  at  the  cost  of  brevity  and  ease  of  comprehension. 


306  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


first  ease,  only  a few  hours  elapse  till  the  finished  product  is 
■turned  gut ; in  the  latter  it  may  be  years,  perhaps  decades  of 
years.  This  is  true  in  particular  of  that  most  important 
productive  good,  “ unskilled  labour.”  Various  portions  of  it 
are  always  being  employed  simultaneously  for  productive 
purposes  that  come  to  maturity  in  the  most  varying  periods  of 
time.  Some  labourers  must  always  get  finishing  work,  which 
pays  its  wages  almost  on  the  moment ; others  must  be  em- 
ployed in  the  intermediate  stages;  others,  again,  at  the  very 
beginning  of  the  total  work  of  production.  Yet  none  of 
them  has  it  written  on  his  forehead  whether  his  work  is  spent 
for  the  present,  or  for  the  coming  year,  or  for  the  remote 
future. 

At  first  sight  it  might  appear  that  this  complication  must 
sensibly  prejudice  what  we  have  laid  down  as  to  the  formation 
and  the  increase  of  value.  Here  is  a good  which  will  he 
used,  perhaps  as  a present  good,  perhaps  as  a future  good. 
Suppose  that  it  is  valued  as  a future  good,  and  therefore  suffers 
a proportionate  diminution  of  value,  it  seems  as  if  this  diminu- 
tion were  unjustifiable  if,  after  all,  the  good  is  used  as  a 
present  good.  But,  again,  suppose  it  is  valued,  without  deduc- 
tion, as  a present  good,  and  is,  after  all,  employed  as  a future 
good,  there  is  no  room  for  increase  of  value.  But  obviously. 
again,  it  is  least  of  all  possible  to  estimate  different  portions 
of  the  same  commodity  at  different  values, — one  portion  as  a 
present  good  without  deduction,  another  as  a future  good  with 
deduction.  Of  ten  loads  of  fuel  of  exactly  the  same  kind  and 
quality,  one  load  is  worth  just  as  much  as  the  other,  as  well 
to  the  householder  as  in  the  timber  market. 

Tlie  apparent  difficulty,  however,  entirely  disappears  if  we 
apply  the  universal  law  of  value  carefully  to  the  special  cir- 
cumstances of  the  case.  The  value  of  a good  is  determined 
^by  its  marginal  utility.  This  marginal  utility  is  _thp.  IpAst. 
impor^t~~use'  or  employment  that  is  provided  for  nut  of  the 
available  stock  of  goods.  Suppose  the  stock  contains  five 
hundred  pieces  of  a kind  which  we  shall  call  A.  These  goods 
possess  the  three-fold  capabihty  of  serving  (1)  immediately  as 
consumption  goods,  (2)  as  means  of  production  in  a five  years’ 
process,  or  (3)  as  means  of  production — in  another  branch  of 
employment — in  a ten  years’  process.  If  they  are  used  for 


CHAP.  Ill 


COM  PLICA  TIONS 


307 


immediate  consumption  the  capabilities  are  as  follows : — one 
hundred  pieces  can  he  used  with  a useful  result  which  we  shall 
represent  by  the  figure  6,  another  himdred  with  a result  which 
we  shall  call  5,  and  a third  hundred  with  a result  which  we  shall 
call  4.  But  if  the  goods  are  employed  in  a five  years’  produc- 
tion process,  there  will  be  a product — call  it  X — of  which  the 
first  himdred  can  be  remunerative  at  9,  the  second  at  8,  and 
the  third  at  7 per  piece.^  But  these  products  will  not  he 
available  before  five  years.  In  to-day’s  estimate,  therefore. 
their  value,  hhe  the  value  of  aU  future  goods,  suffers  a reduc- 

tioa:  the  amount  of  this  reduction  depends  upon  the  amount 
of  the  agio  which  emerges  in  favour  of  present  goods  as  resultant  1 
of  the  many  intersecting  subjective  valuations  in  the  market.  1 
If  this  agio,  for  mstance,  amount  to  5%,  the  value  of  the 
products  available  in  five  years,  as  compared  with  present 
goods,  suffers  a reduction  of  a httle  over  a fifth  part.^  In  the 
valuation  of  to-dav.  therefore,  the  prospect  of  obtaining  in  five. 
years,  from  one  of  the  pieces  employed  as  a means  of  produc- 
tion, a product  which  will  then  have  the  value  of  9,  is  equal 
to  a use  reahsahle  at  the  moment  of  7 ‘05.  In  the  same  way 

the  prospect  of  obtaining  products  of  the  value  of  8 and  7 in 
five  years  is  equal  to  present  uses  valued  at  6 ’2  6 and  5 ’4  8 
respectively.  Similarly  if  the  goods  are  employed  in  a ten 
years’  production  process.  If  this  gives  the  prospect  of 
obtaining  a product — call  it  Y — of  which  the  first  hundred 
can  be  remunerative  at  16,  the  second  hundred  at  12,  and  the 
third  hundred  at  8,  these  products,  as  not  avaOable  before  ten 
years,  suffer  a reduction  in  to-day’s  estimate  of  somethiug 
hke  two-fifths,  and’ are  equal,  respectively,  to  9’82,  7'35,  and 
4-91. 

If  we  group  together  the  present  valuation  of  aU  these 
possibihties.  we  get  the  following  table. 

^ In  order  to  remain  true  to  actual  cases,  so  far  as  possible  within  the  narrow 
limits  of  the  illustration,  I purposely  assume  that  the  value  of  product  decreases 
as  production  in  the  same  branch  increases — the  more  units  the  less  the  value  of 
each  unit.  The  fact  that  even  the  most  remunerative  branch  of  production 
ceases  to  be  remunerative  when  it  is  over-stocked,  is  the  very  thing  that  makes 
it  possible  for  means  of  production  to  seek  different  employments  simultaneously 

^ To  be  accurate  it  is  21  •65%,  or  as  100  :78'35. 


308  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


POSSIBILITIES  OF  EMPLOYING  100  PIECES 


In  immediate 
consumption. 

In  a five  years* 
prcMjess. 

In  a ten  years’ 
process. 

6 

705 

982 

5 

6-26 

7-37 

4 

5-48 

4-91 

The-atock  of  five  hundred  pieces  admits  of  only  five  of  the 
abcffig  possibilities  being  utilised  Nafrurallv  those  fivp.  will  bp. 
ta.kp.Ti  which  irv  I, bp  vain  a linn  nf  — the  only  standard 

for  to-day’s  decision — are  the  most  remunerative.  They  are 
indicated  in  the  above  table  by  black  figures,  and  we  find 
them  to  be  as  follows : — 

100  pieces  used  in  immediate  consumption;  200  pieces 
employed  in  a five  years’  process,  in  making  the  goods  XL;  200 
pieces  employed  in  a ten  years’  process,  in  making  the  goods  Y. 

The  least  remunerative  of  the  employments  indicates  the 
marginal  utility,  and  with  it  the  value  of  the  single  good  A. 
That  least  remunerative  use  bears  the  value  6,  and,  as  it 
happens,  belongs  to  the  present.  A good  of  the  class  A,  then, 
will  be  valued  at  6. 

How  does  this  stand  now  as  regards  the  increment  of  value 
and  the  interest  on  capital?  In  the  case  of  the  hundred 
pieces  which  are  employed  in  the  service  of  the  present,  and 
fetch  a utility  measured  by  6,  there  is  no  room  for  an  incre- 
ment of  value.  But  as  they  afford  their  marginal  utility 
immediately,  they  do  not  require  to  bear  any  interest.  Th^ 
pieces  invested  in  the  five  years’  process  are  worth  6.  and  ip 

five  years  turn  out  a product  which  wiU  be  worth  8.^  Here 
there  is  room  for  an  increase, — at  the  usual  rate  of  5^  for  five 
years, — in  the  ratio  of,  say,  four  to  five ; that  is,  from  6 to  7 ‘5. 

^ If  200  pieces  of  the  good  are  produced  naturally  aU  the  pieces  obtain  one 
equal  value,  and  not  only  the  second  hundred  but  the  first  hnuHred  gets  its  value 
according_to^  tl^  lower^rat^  of  8,  at  which  the  second  hundred  can  be  made 
remunerative. 


CHAP.  Ill 


COM  PLICA  TIONS 


309 


Indeed,  the  room  for  increase,  and  the  gam  in  value,  is  much 
greater.  Beyond  the  normal  interest,  which  is  secured  when 
fee  product  obtains  the  value  of  7‘5.  there  is  a further  profit 
of  0'5  per  piece  as  premium  for  finding  and  utilising  the  most/ 
favourable  opportunities  of  employment  in  the  present  coni, 
juncture ; in  other  words,  as  imdertaker’s  profit.  But  usually 
this  premium  will  not  long  continue  According  to  principles 
with  which  we  are  familiar,  its  existence  attracts  competition, 
and  competition  depresses  price  How  far  will  it  depress  it  ? — 
Hot  lower  than  7’5.  for  7 ‘5,  obtainable  in  five  years,  is  equal, 
in  present  valuation,  to  6 of  present  money,  which  is  just  the 
value  of  the  productive  good  itself.  Anything  less  than  this 
price  of  7 '5,  consequently,  would  not  be  thought  a sufficient 
equivalent  for  the  sacrifice  of  a good  valued  at  6,  and,  in  this  un- 
remunerative  branch,  production  would  be  suspended  until  the 
linlitation  of  supply  again  raised  the  price  of  the  product  to  7‘5 
of  future  money,  as  equal  to  6 of  present  money.  This  being 
a state  of  things  favourable  to  permanence,  although  the  produc- 
tive  (and,  therefore,  future)  good  has  rp.r.ftivp.d  its  value  of  6 fron^ 
a marginal  utility  which  belongs  to  the  sphere  of  the  present, 
and  so  suffers  no  deduction  on  account  of  its  future  nature, 
there  remains  quite  sufficient  room  for  a rise  to  the  higher 
value  of  the  future  product. 

It  is  the  same  with  the  value  and  increase  of  value  of  those 
pieces  invested  in  the  ten  years’  process.  At  the  moment,  valued 
at  the  common  marginal  utility,  they  are  worth  6.  Their 
product,  which  becomes  attainable  in  ten  years,  will  then  be 
worth  12.  This  leaves  room  for  the  normal  increase  of  5^ 
per  annum,  from  6 to  10;  and,  therefore,  over  ten  years, 
makes  possible  an  increment  of  about  two-thirds  of  the  original 
value.  Beyond  this  again  it  1pji.vp.a  rnnm — at  least  in  the  first 
instance — for  the  obtaining  of  an  undertaker’s  profit.  Should 
this  profit  disappear  later  on  in  consequence  of  competition, 
the  future  value  of  the  product  remains,  aU  the  same,  at  10, 
and  thus  leaves  room  permanently  for  the  normal  increase  of 
value,  in  which  consists  the  customary  interest. 

Thus  we  see  that,  although  all  the  pieces  of  class  A were 
valued  at  the  one  figure,  this  one  value  ■guamp-teas-tn  each  of— 
feejpossible  uses  exactly  that  room  for  increase  of  value  whi^h. 
the  remoteness  of  its  finished^  and  final  result  demands.  To 


310  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


the  immediate  use,  where  the  utility  of  the  good  is  at  once 
realised,  it  guarantees  nothing;  to  the  five  years’  process  it 
allows  an  expansion  of  about  one-fourth ; to  the  ten  years’ 
process  an  expansion  of  about  two-thirds  more  than  the 
original  value.  Perhaps  there  is  even  a greater  expansion,  in 
which  case  there  remains  a premium  to  the  undertaker,  but, 
in  any  case,  it  guarantees  the  expansion  just  named. 

And  this  nice  harmony  is  easily  explained  from  what  has 
just  been  said.  Tn  estimating  the  present  value  of_the  many; 
sided  good,  its  possible  future  employments  had  already  heeji 
reduced  to  present  value,  whereby  they  experienced  a discount 
in  exact  ratio  to  their  futurity.  But  only  those  future 
employments  are  foimd  economically  permissible,  whose 
present  (reduced)  value  is,  at  least,  equal  to  the  fixed 
value  of  the  good,  and  whose  effective  future  importance, 
therefore,  is  at  least  greater  by  the  amount  of  the  discount 
made  pro  rata  temporis.  Therefore  each  of  these  future  uses 
has  assured  it  in  advance  a corresponding  scope  for  recovery 
of  its  value.  The  lapse  of  time  replaces  the  value  which  was 
taken  from  the  estimate  by  wav  of  discount,  and  this,  in  the 
near-hand  uses  which  require  to  bear  little  interest,  is  small, 
and  is  correspondingly  great  in  the  remote  uses  which  must 
bear  much  interest.^ 

What  has  here  been  represented  on  a small  scale  by  one 
I'ngjgnpp  obtains  over  the  whole  field  of  ipdustrial  employ- 
ment. It  is  not  a few  hundreds,  but  millions  of  productive  units 
— days  of  labour,  tons  of  coal,  bars  of  iron,  and  so  on — that 
are  invested ; they  are  invested,  not  in  two,  or  three,  but  in 
hundreds  and  thousands  of  separate  employments ; and  each 
of  these  employments  has  a different  period  of  production. 
All  those  means  of  prodixction  enjoy  one  homogeneous  market 
price.  That  price  is  formed  by  the  available  stock  being 

^ By  varying  the  figures  the  reader  may  very  easily  convince  himself  that 
exactly  the  same  result  emerges  if  the  marginal  utility,  which  determines  the 
value,  lies  within  the  sphere,  not  of  the  immediately  remunerative,  bnt 
of  the  productive  employments.  T]he  only  differenceJs  that,  in  this  case,  the, 
chances  of  a temporary  “conjuncture  profit”  between  the  individual  branches 

of  employment,  are  somewhat  altered.  That  production  which  itself  yields 

just  the  marginal  utility  bears  no  conjuncture  profit,  while  such  a profit  is  now 
possible  temporarily  in  the  present  employments,  and  in  the  other  branches  of 
production. 


CHAP.  Ill 


COM  PLICA  TIONS 


311 


distributed  out  among  the  most  remunerative  employments, 
and  according  to  the  degree  of  advantage  which  they  bring.^ 
The  most  remunerative  branches,  in  virtue  of  having  the 
strongest  purchasing  power,  are  supplied  lirst  and  with  the 
greatest  certainty ; then  the  next  remunerative  branches  ; and 
so  on  down  the  scale  till  the  stock  gives  out.  Some  last 
porHnn  nf  thp.  stock,  then,  is  taken  for  some  last  branch  of 
employment,  and  the  modest  advantage  that  accrues  determmes 
the  modest  measure  of  what  those  last  buyers  can  pay  for  the 
productive  unit.  But  as  the  market  price  for  all  portions  of 
the  commodity  is  a homogeneous  one,  the  value  of  the 
employment  last  supplied  determines  the  total  market  price 

of  the  means  of  productioii  But  how,  then,  has  the  advantage 
and  value  of  the  individual  kinds  of  employment  been 
determined  ? — By  applying  the  same  discount  to  employments 
for  future  advantage  as  has  been  described  in  our  illustration  l 
only  that,  in  rough,  practical  life,  the  discounting  is  made  in 
a rough  way  that  takes  a great  deal  for  granted.  In| 
practical  life  men  generally  find  already  in  existence  the 
things  of  which  we  have  tried  to  explain  the  elements,  and 
are  glad  to  accept  them,  without  much  reflection,  as  accom- 
plished facts.  In  the  same  way  do  they  take  interest  for 
granted  as  an  every-day  fact,  and  without  more  ado,  in  all 
calculations  relating  to  future  employment,  they  add  or  deduct 
it.  If  an  undertaker  is  considering  whether  or  not  he  should 
lay  out  one  hundred  pounds  on  a productive  instrument 
which  will  yield  a result  in  two  years’  time,  he  aimplv 
calculates  whether  the  future  return  will  leave,  at  least,  one 
hundred  pmmds  over  and  above  the  two  years’  interesf..  and 
after  deduction  of  the  same.  If  he  has  thus  deducted,  in 
advance,  from  the  future  result  an  amount  of  interest  propor- 
tioned to  time  and  capital,  it  is  a very  natural  thing  that  the 
future  proceeds,  when  actually  realised,  should  contain  and 
yield  that  very  amoimt  of  interest. 


The  foregoing  cases  do  not  by  any  means  exhaust  the 

series  of  casuistical  comnlications-which  obscure  the  working 
of  our  principle  in  the  infinite  variety  of  practical  life. 
Happily  it  is  not  necessary  to  exhaust  them.  Many  are  not 

1 See  above,  p.  230. 


312  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


of  sufficient  importance  to  justify  us  going  into  the  tedious 
abstract  demonstrations  that  would  be  needed  to  explain 
them,  and,  for  the  rest,  I venture  to  hope  that,  in  what  has 
been  already  said,  the  careful  reader  will  find  enough  to 
guide  him  among  complications  not  expressly  discussed, 
without  further  assistance  from  me. 

There  still  remains  for  us,  however,  another  important 
and  by  no  means  easy  task.  It  is,  in  _a  word,  t.n  fnlln-yy  f.]^p 
abstract  into  the  actual,  and  give  it  fonn  and  colour.  Hitherto, 
by  an  argument  which  I hope  is  incontrovertible,  but  which  I 
know  to  be  highly  abstract  and  general,  I have  tried  to  prove 
that  it  must  be  as  I have  maintained : I have  now  to  show 

deduced  everything  from  the  general  proposition  that  pro-^ 
ductive  goods  are,  by  nature.  “ future  commodities,”  I have 
shown  that,  as  logical  result,  the  general  reasons  which  explain 
how  future  commodities  have  a less  value,  must  also  apply  to 
productive  goods,  and  thus  explain  how  there  is  room  for 
expansion  into  the  full  value  of  present  goods,  and  for  the 
''appearance  of  a surplus  value.  H shall  now  attempt,  to  show 
positively  that  all  this  is  as  I have  said,  and  why  it  is.  To 
this  end  I shall  give  a description  of  the  markets,  where,  in 
economic  life,  means  of  production  or  productive  instnunents 
are  exchanged  against  present  goods,  and  shall  try  to  show 
that,  in  these  markets,  the  same  motives,  to  which  we 
ascribe  in  general  the  power  of  calling  forth  a difference  of 
value  between  present  and  future  goods,  do  reaUy  emerge, 
and  emerge  indeed  in  such  combinations,  and  with  such 
strength,  that,  as  the  result  of  the  formation  of  price,  there 
must  always  appear  a disagio  to  the  prejudice  of  the  means 
of  production.  In  doing  so  I hope  not  only  to  bring  forward 
an  adequate  proof  of  the  correctness  of  my  general  deductions, 
but  also  to  obtain  a number  of  new  and  important  lights  on 
the  subject  generally. 


CHAPTEE  IV 


THE  PROFIT  OF  CAPITALIST  UNDERTAKING.  THE  LABOUR 
MARKET 

The  eyp-hanpf!  of  Mpjjns  nf  Prnrliip.tion  against  final  and  finished 

present  goods — practicaUv  against  Money — is  made  in  three 

kinds  of  market : the  Labour  market,  the  market  for  Uses,  of 
Land,  and  the  market  for  Intermediate  Prndnets,  such  as 
raw  materials,  tools,  Machines,  factories,  etc.  Inasmuch  as ; 
labour  and  uses  of  land,  are  the  original  means  of  production  f 
from  the  co-operation  of  which  all  finished  products  come 
into  existence,  the  formation  of  their  price  is  peculiarly  the 
one  which  decides  the  existence  of  profit  on  cn,pital.  In  the 
markets  for  intermediate  products  we  have  only  the  continu- 
ance of  a process  which  has  received  its  own  peculiar  impulse 
in  the  other  two  markets.  And,  of  these  two  ■markets^  again, 
the  labour  market  is  hv  far  the  more  important.  I shall, 
then,  first  take  up  the  circumstances  of  this  market,  and 
shall  endeavour  to  show  and  explain  how  tlie  markeLptfice  of 
the  productive  good_l!JLabour  ” must  always  he  less  than  the 
value  and  prme  of  the  finished  produpk^fjahour. 

Eet  us  assume^that,  in~the  methods  of  production  current 
in  ecmomical  society  at  the  moment,  the  making  of  a product 
ready  for  consnmptinn  require.s  a period  of  time-extendingL 
iiL  _alL  over  two— ypR,r§.  The  technical  productiveness  of  this 
method,  we  shall  assume,  is  such  that  it  takes  a week’s  labour 
to  turn  out  a product  which  will  have  the  value  of  20s. 
The  same  product  may  be  turned  out  by  shorter  methodST^ut 
the  result  will  be  disproportionately  unfavourable.  If  a three 
months’  process  is  adopted,  the  technical  result  falls  to  one-half.: 

if  the  worker  has  no  capital,  and  his  process  is,  accordingly,  one 


314  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


that  yields  its  return  immediately,  the  nroduetiveuess  falls 
to  one -quarter: — that  is.  respectively,  to-lik-  and  Rr.  The 
price  which  can  be  paid  for  the  commodity  “ labour  ” in 
these  circumstances  is  the  question  now  under  discussion  on 
the  labour  market  between  the  labourer  and  the  employers 
I of  labour.  The  price  is  fixed,  in  methods  with  whick-we  are 
familiar,  as  re^tont  of  Jjie  subjective  valuations  of  both 
parties.  How  is  it  ndw^ith  these  valuations  ? 

\ In  the  circumstances  of  modern  industry,  the  wage  workers 

scarcely  ever  possess  sufficient  means  to  utilise  their  own 
lA&hovLT  in  methods  of  production  extending  over  years.^  They 
have,  therefore,  to  face  the  alternative  of  selUng  their  labour. 

or  of  employing  it  on  their  o.wn  ^ account  in  such  short  and 
unproductive  processes  as  the  scanty  means  at  their  disposal 
permit.  Naturally  they  will  make  that  choice  which  is  most 
advantageous  to  them.  Those  workers  who  are  well  enough 
off  to  embark,  on  their  own  account,  on  a production  process 
lasting  at  least  three  months,  and  yielding  a return  of  10  s. 
per  week,  will  be  willing  to  seU  their  labour  at  any  price 
^ver  IQs.  at  any  price  under  10s.  they  will  rather  work  on 
r their  own  account.  On  the  other  hand,  those  workers  who 
are  entirely  without  means,  and  who,  working  on  their  own 
account  in  a hand-to-mouth  process,  coidd  only  have  a return 
of  5 s.,  will  be  willing  to  sell  their  labour  at  any  price  above 
5s.  As.  unfortunately,  the  labourers  who  pnt.i-pply  -without 
capital,  form  to-day  the  great  majority,  we  may  assume  for 
our  illustration  that  the  “ Supply  ” of  labour  will  be  repre- 
. sented  by  a long  row  of  workers  who  are  ready,  in  the  worst 
•/  case,  to  sell  the  week’s  labour  for  5 s.,  and  a shorter  row  who 
will  do  the  same  for  10s  present  money 

How  is  it  now  with  the  Demand  for  labour  that  confronts 
this  supply  ? 

^ Whether  it  take  the  form  of  completing  the  two  years’  production  process  ^ 
from  beginning  to  end  by  their  own  labour,  or  that  of  introducing  their  own 
labour  at  a later  stage, — e.g.  in  the  fourth  half-year  of  the  total  production 
process, — and  buying  the  fruits  of  the  preparatory  labour. — raw  materials,  tools, 
etc., — from  the  others  who  have  performed  that  previous  labour. 

" The  pleasure  of  an  independent  position  may  indeed  very  often  create  a 
preference  for  labour  on  one’s  own  account,  even  although  the  labourer  might 
obtain  a somewhat  greater  income  by  taking  a wage.  Influences  of  this  kind, 
however,  can  alter  only  the  figures,  not  the  principle. 

^ Of  course  the  possibility  open  to  the  -labourer  in  question  of  realising 


CHAP.  IV 


THE  LABOUR  MARKET 


315 


The  demand  comes  from  the  Capitalist-Uiidertakeiir  ^he 
valuation  they  put  upon  the  labour  thev  wish  to  buy  is  so  far 
more  definite,  inasmuch  as  the  commodity  labour,  capable  of 
so  many  employments,  is  looked  at  by  them  in  connection 
with  one  definite  employment;  namely,  the  one  carried  on[yA 
by  themselves.  To  them,  accordingly,  the  week’s  labour, 
which  they  wish  to  buy  for  the  capitalist  process,  is  worth 
just  so  much  as  the  product  which  it  will  turn  out  in  this 
capitalist  process.  On  our  assumption,  this  will  be  20  s. 
available  in  two  years.  But  the  question  for  the  undertaker 
still  remains : what  are  20s..  available  in  two  years,  worth  in 
rpj^f.lnn  tn  t.hp  present  shillings  in  which  he  must  pay  tire- 

week’s  lahmin 

Once  for  aU,  let  us  make  this  entirely  clear.  If  the 
capitalists  were  to  realise  their  entire  resources  as  present 
goods, — that  is,  to  consume  their  wealth  in  present  enjoyment, 

— the  want  of  the  present  would  evidently  be  provided  for 
in  superfluity,  while  the  want  of  the  future  would  have  no 
provision  whatever.  Thev  must,  therefore,  find  pnsil.ivply 
advantageous  to  change  a part  of  their— resources  into  future 
goods  of  some  kind  or  other.  In  other  words : if  we  look 
only  at  the  relations  of  want  and  provision  for  want  in  present 
and  future,  present  goods,  as  such,  are  worth  even  less  than 
future  to  the  owner  of  a stock  of  wealth  which  is  greater  than 
his  present  wants.  It  is  true,  of  course,  that  there  is  a very  J 
simple  wav  of  changing  present  goods  into  future : they  can 
be  stored  away  either  in  natura,  or  in  the  neutral  form  of 
jjiture  money.  This  possibility  naturally  saves  them  from  the 
prejudice  to  their  value,  which  would,  in  itself,  result  from 
the  overabundant  provision  for  the  present,  but,  on  the  other 
hand,  it  does  not  give  them  any  positive  advantage  in  value, 
or,  at  any  rate,  a very  trifling  one.^ 

his  labour  in  other  branches  of  activity,  can  do  little  or  nothing  to  alter  the 
position  of  circumstances  assumed  in  the  text.  For  if  the  other  branches  are 
such  as  likewise  demand  a somewhat  long  production  period  the  matter  stands 
just  the  same  with  the  labourer  of  this  branch ; and  the  few  branches  which 
a man  with  no  capital,  or  almost  no  capital,  can  take  up  with  any  result. — 

such  as  in  particular  the  performance  of  personal  services,  domestic  service, 
and  the  like, — can,  from  their  nature,  afford  a remunerative  refuge  only  to  a 
limited  number  o£  workers,  while  any  strong  pressure  would  immediately  result 
in  overstocking  and  a corresponding  curtailment  of  the  advantage. 

1 See  above,  p.  250. 


318  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


Nor  can  the  nnrlPirfAstiTnnrp.  .of  future  wants  form  a reason- 
able any  juch  advantage.  ^TlTv^i  seldom  be  strong 

enough  to  outweigh  the  counteracting  consideration  of  the 
overabundant  provision  for  the  present,  and  to  prevent  the 
capitalists  from  preferring  to  employ  part  of  their  wealth  in 
the  service  of  the  future.  Persons,  moreover,  in  whom  this 
want  of  foresight  might,  exceptionally,  be  found,  are  not,  or 
at  least  would  not  long  remain,  capitaUsts.  An  estimate 
like  theirs,  dictated  by  momentary  desire  and  carelessness  of 
the  future,  would  soon  bear  its  consequences,  and  bring  their 
fortunes  into  spendthrift  consumption. 

Of  the  three  considerations,  therefore,  which,  as  we  have 
seen,  generally  serve  as  foundation  for  the  preference  of  present 
over  future  goods,  the  first  two  do  not  apply  as  regards  the_ 
great  majority  of  capitalists.  It  is  our  third  consideration. 
the  well-known  technical  superiority  of  present_gqpdg,  or,  as  it 
is  usually  called,  the  “ productivity  of  capital.”  which  is  decisive 
with  them.  The  way  in  which  it  takes  effect  is  essentially 
different  in  simple  circumstances  from  what  it  is  in  the  full 
development  of  our  modern  economic  life. 

In  simple  circumstances,  where  the  undertaker  is  himself 
a worker,  and  has  no  capital  to  speak  of,  present  goods  imme- 
diately obtain  a higher  use  value.  An  undertaker,  for  instance, 
has  just  enough  wealth  to  defray  the  subsistence  of  one  working 
person  for  four  years, — or  to  advance  that  amount.  The  choice 
is  now  open  to  him,  either  to  work  by  himself  iu  a four  years’, 
process,  or  to  assume  a helper  and  work  alongside  of-iiinLin  a, 

two  years’  process.  In  a two  years’  process  the  week’s  labour 
yields,  as  we  have  assumed,  20s.:  in  a four  years’  process — 
since  longei;  methods  are,  technically,  more  productive — it 
will  yield,  say,  24s.  The  balance  now  stands  as  follows. 
If  our  capitalist  pays  his  helper,  for  the  week’s  work,  the  full 
20s.  in  present  money,  he  has  to  pay  him  £104  for  the  two 
years’  work ; from  its  product  he  recovers  just  this  sum  of 
£104;  and  finally,  he  can  pay  himself  only  20s.  a week,  that  is, 
in  aU,  £104.  His  total  net  income,  for  the  two  years,  thus 
amounts  to  £104.  On  the  other  hand,  if.  instead  of  spending 
£104  in  paying  a labourer,  he  spends  it  on  his  own  mainte- 

TTg.ucp.  during  a third  and  fourth  year  of  production,  he  may, 
from  the  104  weeks  of  his  own  labour  time  at  the  higher 


CHAP.  IV 


THE  LABOUR  MARKET 


317 


rate  of  24s.  per  week,  reenver  £1  24  : 1 6s. : so  that  his  two 
ypars’  net  income  is  increasefi  hy  £20  1 1 6.s.  Tn  these  circmn- 
stances  it  is  obviously  more  advantageous  for  the  capitalist  to 
have  no  helper.  To  obtain  any  advantage  from  a helper  it 
must  be  possible  to  pay  him  at  such  a price,  that  the  capitalist 
gains  more  by  the  buying  of  another  person’s  labour  than  what 

he  loses  in  the  realisation  of  his  own  labour,  bv  the  shortening 
of  the  production  period:  in  other  words,  that  20s.  a week 
present  money  paid  in  wages  should  bring  him  more  than  24s. 
a week,  future  money,  in  products.  This  will  only  be  the  case 
if  he  can  pay  a weekly  wage  that  is  under  1 6s.  8d4 

Were  the  circumstances  of  capitalist  production  generally 
so  simple  as  this,  the  value  to  the  undertakers  of  20s.  in  future 
products  would,  speaking  generally,  be  equal  to  the  value  of 
16s.  8d.  present  money, — the  actual  figures  varying  a little, 
but  not  the  tendency.  And  if  the  buyers  value  the  commodity 
labour  at  not  more  than  16  s.  8d.,  while  the  sellers  value  it  at, 
perhaps,  5 s.  or  10  s.,  it  is  clear  that  the  resultant  of  these 
valuations,  the  price  of  labour.  wiU.  in  no  case,  exceed  the 
amount  of  16s.  8d..  and  must  a foi'twri  come  under  20s..  the 

fu11_j^uTn  of  the  future  product — which  was  the  point  to  be 
proved. 

But  the  circumstances  of  present-day  industry  are  not  so 
simple.  The  great  majority  of  our  undertakers  are  not  them- 
selves workers,  and  their  capitals,  moreover,  are  generally  so 
great  as  to  be  far  above  what  any  one  man  coiQd  use  for  hi& 
subsistence  during  the  very  longest  practicable  process.  Th^ 
possibility,  which  capital  gives  its  owner,  of  employing  his  ovmi 
labour  in  longer  production  processes  does  not,  therefo  7^  aj 
rule,  under  present  conditions,  give  any  higher  use  value  tol 
present -goodsr-  Our  illustration  of  simple  circumstances  has'^ 
very  great  importance  in  other  lines  of  proof, — of  which  later, — ‘ 
but  it  does  not  suffice  to  explain  the  profit  of  capital  in  the 
circumstances  of  capitalist  industry.  These  very  complicated 
circumstances,  however,  develop  a phenomenon  which  works, 
in  another  form,  to  the  same  end ; this  phenomenon  is  Credit. 
The  capitalist  cannot  use  his  present~goods  to  make  his^wn 
labour  more  fruitful,  but  others  are  willing  to  take  them  in  , 
exchange  for  future  goods  to  make  their  labour  more  profitable. ' 

1 16s.  8d.  : 20s.  =£104:  £124  :16s. 


318  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


nd  are  very  willing  to  pay  an  agio  in  future  goods.  And, 


^vidently,  the  capitalist  need  not  barter  his  present  money  at 
par  with  the  workers  for  their  future  product,  when  he  can 


obtain  on  the  loan  market,  for  a certain  sum  of  present  goods, 
greater  sum  of  future  goods. 

One  is  tempted  to  apply  this  fact  to  the  explanation  of 
profit,  as  if  it  were  owing  to  the  chances  offered  on  the 
market  for  loans  that  the  capitalist’s  present  goods  had,  in  all 
j cases,  a higher  subjective  exchange  value  than  future  goods. 
But  this  is  not  my  idea  of  explanation.  We  have  no  right 
either  to  represent  loan  interest  as  a faii  acc.om,pU,  and  pyplaip 

natural  profit  on  capital  from  it.  or,  conversely,  to  represent 
the  latter  as  a fait  accompli,  and  explain  loan  interest  thereby. 
The  fact  is  that  the  Loan  market  and  the  Labour  market  are 
two  markets  on  which  one  and  the  same  commodity  is  mutually 
offered  and  demanded,  viz.  Present  (lond.c!.  On  both  markets 
the  demand  is  for  means  of  subsistence,  with  the  view  of 
making  labour  more  profitable  by  longer  processes  of  production; 
only  the  circumstances  of  demand  are  different.  Por  the 
present  goods  which  he  receives  the  wage  worker  gives. 
wholly  and  entirely,  the  indefinite  future  nrodupt.  wViir^h 
labour  mav  create : the  borrower  in  productive  credit — con- 
sumptive credit  is  much  less  important,  but  manifests  its 
effects,  in  the  long-run,  in  exactly  the  same  direction — gives, 
in  exchange  for  present  goods,  a definite  quantity  ef  future 
products,  and,  if  the  actual  product  differs  from  this  quantity, 
may  gain  or  lose  by  it.  Thus  wage  workers  and  borrowers 
form  two  branches  of  the  same  demand ; they  mutually 
support  its  effect ; and  jointly  help  to  form  the  resultant 
price.  Only  in  outside  appearance  are  they  two  distinct 
markets ; in  reality  they  overlap  each  other ; and  the  market 
price  of  present  goods  is  their  joint  result. 

To  get  to  the  root  of  the  matter  therefore,  before  consider- 
j ing  isolated  and  partial  markets,  we  must  take  a.  cnmprphftnaivp. 
/ survey  of  that  total  market  for  advances  of  subsistence  which, 
L.  in  every  economic  community,  is  built  upon  numerous  com 
' municating  partial  markets. 


CHAPTEE  V 


THE  PROFIT  OF  CAPITALIST  UNDERTAKING.  THE  GENERAL 
SUBSISTENCE  MARKET 

At  the  outset  we  must  enunciate  a proposition,  as  simple  as 
it  is  fundamental,  but  one  on  the  proper  understanding  of 
which  everything  depends : In  any  economical  p.nTr|prn,n{:t$rFFj>;’ 
supply  of  subsistence,  available  for  advances  of  subsistence,  is  V 
— with  one  trifling  exception — represented  by  the  total  sum  | 

of  its  wealth  (exclusive  of  land).  The  function  of  this  wealth  J 

{Vermogm)  is  to  maintain  the  community  from  the  time  that 
their  original  productive  powers  are  put  in  motion  till  these  y 
powers  obtain  their  final  and  mature  fruits — in^otlier  words.  tn(^ 
mnintain-  rh^ -^ommnnity  during  the  average  social  period  of' 
production.  The  greater  the  total  stock  of  wealth  in  the  com-/ 
munity  the  longer  may  be  this  social  period  of  production. 

Here  we  really  have  three  propositions,  but  they  are  so  in- 
timately connected  that  they  may  be  conveniently  grouped  into 
one,  and  explained  and  proved  by  one  and  the  same  argument. 

If  we  look  at  the  uses  to  which  a country’s  accumulated 
wealth  is  destined  and  put — leaving  land  out  of  account — we 
get  something  like  the  following  picture.  Some  few  owners 
of  wealth,  whether  from  necessity  or  from  prodigality,  tbero^- 
selves  consume  it.  Others  who  produce  on  a moderate  scale 
for  their  own  account  spend  their  wealth  in  furnishing  them- 
selves with  the  necessary  maintenance,  during  their  production 
period.  But  all  other  wealth — and  that  is  by  far  the  greater 
amount — is,  in  some  form  or  other,  brought  to  the  great 
market  for  Advances  of  Subsistence  as  Supply.  The  owner 
either  puts  it  into  some  undertaking  carried  on  by  himself,  or 
he  lends  it  to  other  people.  If  be  puts  •'nt»  his  own 


320  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


business  it  is,  directly  or  indirectly,  employed  in  giving 

advances  of  subsistence  to  labourers.  I say  directly  or 
/indirectly,  for  the  division  of  labour,  splitting  up,  as  it  does, 
the  one  united  work  of  production  into  a series  of  apparently 
independent  stages,  causes  an  important  distinction  in  form, 
although  it  does  not  affect  the  essence  of  the  matter.  If  the 
different  stages  of  one  and  the  same  production  process  were 
united  in  the  hand  of  one  and  the  same  undertaker,  he  would 
not  'buy  any  previous  product : all  previous  and  intermediate 
products  needed  would  be  made,  from  the  beginning,  by  the 
workers  in  his  employment.  Here,  therefore,  his  entire 
“ business  capital  ” would  evidently  be  directly  devoted  to 
advancing  subsistence  to  labourers.  As  it  is,  under  the 
division  of  labour,  he  gets  his  previous  products  made  by  other 
undertakers,  and  buys  them  from  these  other  undertakers. 
This  amounts  to  saying  that,  by  this  purchase,  he  takes  upon 
himself  the  burden  of  the  advances  hitherto  borne  by  the  othe^- 

[y  undertakers,  and  thus  puts  them  again  in  a position  to  take 
upon  themselves  the  burden  of  advancing  subsistence  for 
the  following  period  of  production.  These  previous  and  inter- 
mediate products,  then,  thus  purchased,  he  gets  worked  up  by 
labourers  who  are  directly  in  his  pay.  In  this  way,  there- 
fore, by  his  wage  payments  he  advances  subsistence  directly 
to  one  set  of  workers,  and  indirectly  by  his  “ outlays  ” to  a 
number  of  other  sets  (employed  in  the  preceding  stages).^ 

' It  will  perhaps  be  objected  that  the  purchase  amounts  which  the  under- 
takers of  the  previous  stages  receive  contain,  not  only  a simple  replacement  of 
the  advances  of  subsistence  paid  by  them  to  workers,  but  frequently  also  replace- 
ment of  the  uses  of  land  consumed,  and,  in  any  case,  some  profit  on  capital. 
The  fact  is  correct,  but  it  makes  no  difference  in  the  conclusions  which  I think 
are  to  be  drawn  from  what  I have  said  above.  The  necessity  of  paying  in 
advance  for  uses  of  land,  the  return  of  which  will  not  be  obtained  till  after  long 
methods  of  production  have  been  completed,  has  the  same  effect  on  the  price  relation 
between  finished  present  goods  and  original  productive  powers,  as  the  necessity  of 
paying  for  labour  in  advance  has.  The  market  for  uses  of  land  is  only  a third 
part-market  in  addition  to  the  market  for  credit  and  the  market  for  labour,  3a!li£ie, 
in  similar  ways,  present  goods  are  sold  against  future  go.oda_(see  above,  p.  313), 
and,  consequently,  as^egards  its  effects  on  price,  the  demand  of  this  market  for 
present  goods  mutually  assists,  and  is  assisted  by,  the  demand  of  the  other  part- 
markets.  This,  however,  will  be  made  clearer  as  we  go  on.  Finally,  T must 
here  leave  nut  of  consideration  the  profit  of  the  undertaker,  if  I would  not  beg 

the  question.  Its  existence  is  the  result  of  a certain  market  condition  in  the 
subsistence  market,  and  therefore  cannot  be  assumed.  It  is  not  because  tne 


CHAP.  V THE  GENERAL  SUBSISTENCE  MARKET 


321 


If,  again,  the  owner  Ip.nd  his  wpalt.h  to  others,  it  may  be 
either  for  nnri.qnmpl-ioTi  nr  for  production.  If  the  former,  the 
sum  lent  is  a direct  advance  of  subsistence  to  the  borrower : 
if  the  latter,  it  passes,  as  already  described,  from  the  borrowing 
employer  to  the  labourers,  as  advance  of  subsistence.  Thus  a 
the  entire  accumulated  wealth  of  society — with  the  very  trifling  j 
exception  of  that  portion  which  the  owners  themselves  con-/ 
sume  ^ — is  really  brought  into  the  market  as  supply  of  advances, 
of  .qubsistencp. 

But  the  objection  may  be  raised : How  can  the  entire-^ 
stock  of  wealth  be  offered  as  advances  of  .subsistence .whop 

that  stock  consists  only  partially,  and,  indeed,  to  a very  small 
extent,  of  actual  mpaos  of  Rnb.sistencp  such  as  food,  clothing, 
dwelling-houses,  etc.,  while  the  great  bulk  of  wealth  is 
represented  by  goods  that  are  not  adapted  for  immediate 
consumption,  such  as  tools,  machines,  raw'  materials,  factory 
buildings,  and  the  like  ? 


The  seeming  inconsistency  is,  however,  easily  explained ; 
it  is  simply  that  men  never  need  their  subsistence  for  the 

entire  production  period  all  at  once.  If,  in  any  community, 
ten  millions  of  men  invest  their  original  productive  powers, 
Labour  and  LTses  of  Land,  in  an  average  production  period  of 
two  years,  it  is  quite  unnecessary — indeed  undesirable — that 
at  any  one  moment  the  means  of  subsisting  the  ten  millions 
for  the  whole  two  years  should  be  accumulated  in  finished 
form.  It  is  sufficient  if  there  is  enough  in  finished  form  for. 
sav,  one  month^  and  if,  in  the  meantime,  the  means  of  subsist- 
ence for  the  following  month  are  ripening  into  finished  goods. 


/ 


profits  of  the  undertaker  absorb  a part  of  the  available  means  of  subsistence 
that  the  sunnlv  of  means  of  subsistence  is  so  weak  as  to  give  them  an  agio  as 

against  productive  ^oods^  It  is  because  the  supply  of  means  of  subsistence,  even 
without  consideration  of  profit,  is  insufficient,  that  these  means  of  subsistence 
receive  an  agio,  and  the  undertakers  who  advance  them  receive  a profit.  More- 
over it  is  easily  seen  that,  by  eliminating  profit  from  the  argument  with  which  I 
started  in  the  text,  I do  not  make  it  any  easier  to  reach  the  final  result,  that  of 
giving  a reason  for  the  agio  on  means  of  subsistence,  but  make  it  more  difficult. 
That  is  to  say,  if,  as  I assume,  the  whole  stock  of  means  of  subsistence  is  dis- 
posable for  the  granting  of  advances  to  labourers,  it  will  be  more  difficult  in  any 
case  for  this  more  ample  supply  to  be  exceeded  by  the  demand,  than  if  a portion 
of  the  supply  appears  to  be  already  hypothecated  to  profit. 

^ The  much  more  important  matter  of  the  consumption  of  the  income  from 
capital  does  not  belong  to  the  present  question  : as  was  shown  in  last  note  it  is 
only  a result  of  the  supply  of  wealth  being  insufficient  as  against  the  demand. 


Y 


322  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


Tn  other  words,  all  that  is  needed  is  that  previous  labour 
pT-nviflpd  so  many  gOOc1s-rr:^.pflrt,1y  rparly  for  rr|n- 

gnmptinn.  partly  in  the  intermediate  foriiLof  products  ripening 
successively  into  consumption  goods — as  will  cover  the  sub- 
sistence needs  of  two  years,  and  thereby  make  it  possible 
for  the  workers  to  invest  their  current  labour  in  methods  of 
production  that  will  turn  out  the  finished  product  in  two  years. 

Here  we  come  to  the  second  part  of  our  threefold  proposi- 
tiiin.  The  entire  wealth  of  the  economical  community  serves 
as  subsistence  fund,  or  advances  fund,  and,  from  this,  society 
draws  its  subsistence  during  the  period  of  production  customary 
in  the  community.  All  goods  which  appear  to-day  as  the 
stock  or  parent  wealth  of  society,  so  far  as  they  are  not  already 
consumption  goods,  will,  in  the  more  or.  less  near  future,  after 
a certain  addition  of  finishing  labour,  ripen  into  consumption 


g(2£4^  and  will  consequently  cover,  for  a more  or  less  lengthy 
time  to  come,  the  people’s  demand  for  consumption.  Of  course 
this  must  not  be  understood  as  if  there  were  some  sharp  line 
of  division  separating  the  period  which  is  covered  by  the  wealth, 
already  on  hand  from  that  later  period  which  is  not  yet  covered, 
and  for  which,  consequently,  provision  must  he  made  through 
the  current  productive  powers.  What  I mean  is  that  tfie 
stock  of  wealth  projects  itspK  intn  fhe.  future,  as  prrivisinn.  for 
the  consumption  of  the  future,  as  it  were  by  stages,  and  not 
all  at  once. 

It  does  so  in  two  respects : in  respect  of  the  number  of 
classes  of  goods  for  which  provision  is  made,  and  in  respect 
of  the  rlppfpp  of  maturity  at  which  the  work  of  production 
stands  in  the  present.  As  regards  the  first ; it  is  to  be  noted 
that,  for  technical  reasons,  in  many  classes  of  goods  in 
various  foods)  provision  is  limited  to  the  near  „ future.,  perhaps 


to  a couple  of  months,  while,  simultaneously,  in  other  classes  of 
goods,  provision  may  be  made  for  a couple  of  years.  In  others, 
again,  where  permanence  is  aimed  at,  or  goods  must  be  got 
ready  long  in  advance  {e.g.  in  dwelling-houses,  mining  products, 
machinery,  and  the  like),  the  means  of  provision  must  be  prepared 
perhaps  twenty  or  fifty  or  even  a hundred  years  before.  Tims, 
tfipn,  it  is  in  the  nature  of  things  that  goods  required  in  the  Imr 
mediate  future  must _naw,be.ready_or  almost  ready:;  for  goods 
needed  later,  it  is  enough  if,  at  the  moment,  they  have  gone 


CHAP.  V 


THE  GENERAL  SUBSISTENCE  MARKET 


323 


through,  perhaps,  half  of  the  production  process;  while,  for  goods 
recjuired  still  later,  it  may  be  enough  if  their  production  should 
have  just  begun.  If  a commodity,  for  instance,  requires  five 
years  to  make,  then,  in  the  year  1888,  the  goods  of  this  class 
destined  to  be  used  in  the  year  1889  must  be  ready,  perhaps 
to  the  extent  of  four-fifths ; those  to  be  used  in  1890  to  the 
extent  of  three-fifths ; those  to  be  used  in  1891  to  the  extent 
of  two-fifths ; while,  as  regards  goods  destined  for  the  service 
of  the  year  1892,  it  is  enough  if,  at  the  moment,  they  have 
gone  through  the  first  fifth  of  their  total  production  process. 

Thus  it  comes  that  the  stock  of  wealth  existing  at  the 

moment  makes  provision  for  the  future  in  a doubly  decreasin 


raUo : in  proportion  as  the  time  of  consumption  is  remot^ 
there  are  fewer  classes,  and  the  goods  in  these  classes  are  less 
advanced  or  mature.  To  get  an  adequate  representation  of 
the  circumstances  of  provision,  then,  we  should  have  to  suppose 
that  thp  .qfnpV  nf  wpnith  existing  on  1st  January  1888  ^ con- 
tainsof  the  goods  required  during  1888  and  tbn.<^p.  gonds; 
are,  on  the  average,  finishecL.  so  that,  on  the  whole,  the 
labour  required  for  the  needs  of  1888  is  already  finished  and 
incorporated  in  the  existing  wealth  to  the  extent  of  : that, 
further,  it  contains  of  the  goods  required  during  the  year 
1889  finished,  thus  incorporating  of  the  labour 

required  for  1889  : that  it  contains  ^ of  the  goods  wanted 
for  1890  finished,  thus  incorporating  of  the  labour 

required  for  1890,  and  so  on  for  1891,  1892,  1893,  incor- 
porating respectively  and  of  the  total  labour 

required  for  the  service  of  these  years.  Adding  up  these 
amounts  we  come  to  the  result  which  I wished  to  elucidate 
by  this  illustration ; viz.,  that  the  entire  p.yisting  stnp.V  nf 
wealth  provides  in  advance  for  something  like  two  years’  ^ 

demand  of  the  population,  with  this  peculiarity  that  the  stock 
of  wealth,  instead  of  covering  the  exigencies  of  two  continuous 
years,  covers  successively  a decreasing  portion  of  the  exigencies 
of  a greater  number  of  calendar  years. 

Now  the  way  in  which  this  provision  is  made  by  the 
existing  wealth,  and  the  extent  to  which  it  is  made,  exercise 

^ The  figures  are,  of  course,  only  chosen  for  illustration. 

2 0-81-i-0-56-l-0-24-tO-12  + 0-06-t-0-04+.  . . 


324  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


a very  suggestive  and  impoitant  influence  on  the  employment 
of  the  original  productive  powers,  labour  and  uses  of  land, 
coming  into  operation  in  the  current  year.  For  dmplicity’s 
sake  we  shall  consider  the  former  only  in  detail.  If  the  stock 
of  wealth  in  existence  in  1888  covers  the  want  of  the 
current  year  to  the  extent  of  3^,  it  is  clear  that  from  the 

/labour  of  this  year  the  other  ^ will  first  be  covered.  But  it 
is  as  certain  that  the  remainder  of  the  current  labour  will  not 

be  devoted  to  tbe  service  of  the  year  1888.  and  that  for  two 

reasons : (1)  that  any  return  in  the  year  1888  could  only 
be  obtained  by  an  unremunerative  hand-to-mouth  method  of 
production,  and  (2)  that  the  few  products  thus  obtained  would 
come  upon  a market  already  .stockejl  and  find  poor  sale  and 
poor  prices.  The  other  of  the  labour  of  the  year  will, 
! therefore,  be  directed  to  the  service  of  later  years.  And  here, 
again,  the  following  is  clear : the  fewer  the  -wants  of  188D 
covered  by  the  existing  stock  j)f^  wealth,  the  greater  will  l;)e 
tb^amount  of  the  current  .year’s  labour  directed  to  the  service 
of  the,  year  1889 — if  there  is  not  to  be  a gap  in  the  provision 
from  year  to  year — and  the  smaller  will  be  the  amount  of 
labour  directed  to  the  service  of  the  years  that  come  after  it. 
Conversely  if  the  wants  of  1889  are  already  (relatively  speak- 
ing) amply  covered  by  the  stock  of  wealth,  only  a small 
fraction  of  the  current  labour  will  go  to  the  service  of  1889, 
and  a proportionally  greater  amoimt  can  be  reserved  for 
remoter  periods.^  The  current  labour  thus  adapts  —itself 
naturally  to  the  existing  stock  of  wealthy  The  one  begins 
where  the  other  ends.  If  it  were  to  begin  sooner,  and  so 
duplicate  the  provision  already  existent,  it  would  come  under 
the  double  disadvantage,  already  inen tinned,  of  overstocked 
markets  and  less  productive  methods  of  production ; and  if  it 
were  to  begin  later,  there  would  be  a gap  in  the  provision 
which  would  immediately  cause  scarcity  prices,  and  thus  call 
out  speedy  assistance  from  the  productive  powers. 


1 It  would  be  erroneous  to  assume  that,  after  the  demand  of  the  current  year 
is  Covered,  the  current  labour  must  be  directed  to  the  demand  of  the  next 
annual  period  till  such  .time  as  this  is  /M</2/_covired  ; that,  e.g.,  if  of  the 
demand  of  1889  is  covered  by  existing  wealth,  the  labour  of  1888  must,  or  even 
might,  immediately  prepare  the  remaining  But  in  1888  the  maturing  of. 
finished  products  is  c^ried  forward  only  one  stage,  and  is  itself  fully  terminated 
only  in  the  year  1889  b.Y.an  addition  of  .the,  labour  of  1389, 


CHAP.  V THE  GENERAL  SUBSISTENCE  MARKET 


325 


Thus  it  is — and  here  we  come  to  the  last  part  of  our 
threefold  proposition — that,  in  reasonable  economic  speculation, 
the  current  productive  powei^s  will  and  mu.st  ou  the  average, 
be  directed  to  remote  nroductive  purposes  (or,  in  other  words, 
invested  in  longer  production  periods),  in  proportion  to  the 
length  of  time  for  which  the  existing  stock  of  wealth  is  able, 
to  provide.  If  the  accumulated  wealth  is  so  small  that  it 
only  provides  subsistence  for  one  year,  it  is  perfectly  clear 
that  it  is  impossible  to  invest  the  current  productive  powers 
in  processes  that  average  three  years,  since,  in  the  interval 
that  must  elapse  between  the  consumption  of  the  old  wealth 
and  the  production  of  the  new,  the  people  would  starve.  And 
it  is  equaUy  clear  that  it  would  be.  in  the  highest  rjegree, 
foolish  and  uneconomic  to  make  the  production  period  shorter 
than  the  existing  wealth  allows.  The  average  period  of  pro-t"  - , 
duction  in  a community  is  in  exact  correspondence  with  th^ 
amount  of  its  stock  of  wealth,  and  is  entirely  conditioneA 
by  it. 

The  principle  is  clear,  but  one  not  unimportant  question  of 
figures  still  remains  to  be  considered : What  is  the.  TmTnp.rica.1^ . 
ratio  between  the  amount  of  a nat.inn’.s  wealth  and  the  average 
production  period  which  that  wealth  limits  ? 

At  the  first  glance  one  would  be  inclined  to  answer ; — 
the  average  production  period  may  be  just  so  many  months 
or  years  as  there  is  months’  or  years’  provision  in  the,  accu- 
mulated wealth.  If,  for  instance,  the  year’s  wants  of  a nation 
are  five  hundred  millions,  and  the  nation’s  wealth  contains 
goods  to  the  value  of  a thousand  mUhons,  we  should  be 
inchned  to  say  that  the  average  production  period  would  be 
two  years. 

This  answer,  however,  would  be  incorrect : or,  to  put  it 
more  exactly,  it  would  only  be  correct  under  conditions  which 
do  not  actually  occur  in  practical  life.  It  would  only  .he 
correct,  that  is  to  say,  if  the  work  of  production  was  not 
carried  on  bv  stages.  If  production  were  so  arranged  that 
all  the  workers  co-operating  generally  in  the  manufacture  of 
a finished  product  were  employed  simultaneously  in  the  same 
stage — I mean  if  all  the  workers  were  to  begin  with  the  first 
and  preliminary  processes  simultaneously;  were  then  to  pass  on 
simultaneously,  as  it  were  in  line,  to  the  second,  third,  fourth 


/ 


326  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


stage,  till,  in  the  end,  they  simultaneously  turned  out  the 
total  product  finished  and  completed, — then,  of  course,  the 
community’s  wealth  must  contain,  in  the  form  of  finished  goods, 
enough  to  supply  the  wants  of  just  as  many  years  as  there  are 
years  in  the  production  period.  Suppose,  for  instance,  that  the 
manufacture  of  clothing  were  so  arranged  that  all  the  workers 
employed  in  it  prepared  the  wool  in  the  first  year,  built 
machinery  in  the  second,  spun  yarn  in  the  third,  wove  it  in 
the  fourth,  and  made  up  the  cloth  in  the  fifth,  the  stock  of 
wealth  would  require  to  con  tain— fim' shod  provisirm  for  the 
entire  demand  of  all  the  workers  during  five  ypuTg.  For, 
under  a division  of  labour  of  this  kind,  during  all  the  five 
years  there  would  be  no  addition  of  finished  goods  to  the 
original  finished  stock. 

It  is  quite  different  if  production  is  arranged  in  stages, 
as  it  actually  is  in  modern  industry.  Of  the  workers  occupied 
in  the  production  of  clothing — to  continue  our  illustration 
—various  groups  are  employed  simultaneously  at  various 
stages  of  it.  In  each  year  a fifth  part  of  them,  perhaps,  will 
produce  wool,  another  fifth  make  machinery,  another  spin, 
another  weave,  and  another  do  the  making  up.^  The  result 
is  that,  during  the  five  years  that  elapse  between  the  growing 
of  the  wool  and  the  making  of  the  coat,  additions  are  succes- 
^sively,  made  to  the  fruits  of  labour  which  constituted  the  stock 
of  wealth  at  the  beginning  of  the  period : that,  is  tn  say^_Q£bpr 
fruits  of  labour,  the  results  of  labour  expended  at  later  periods. 

are  arriviug  at  the  stage  of  finished  goods.  Say,  for  instance, 
that  on  1st  January  1888  a group  of  labourers  begin  the 
manufacture  of  woollen  clothing.  Nothing  of  the  fruits  of 
this  labour  will  be  ready  before  1st  January  1893.  On  the 
other  hand,  besides  the  wholly  or  partially  finished  products 
contained  in  the  inventory  of  1st  January  1888,  the  following 
goods  will  arrive  at  maturity  before  1st  January  1893  ; — viz. 
the  fruits  of  one  year’s  labour  of  those^  workers  who  are  busy 
with  the  final  stage  in  1888  ; of  two  years’  labour  of  those 
busy  with  the  second  last  stage  in  1888  and  with  the  last 


* It  is  all  the  same  as  regards  the  effect  whether  the  same  persons  perform 
the  labour  of  all  stages  of  production  successively,  or  whether — as  is  the  case 
under  the  division  of  labour — certain  persons  remain  constantly  occupied  in  one 
and  the  same  stage. 


CHAP.  V THE  GENERAL  SUBSISTENCE  MARKET 


327 


stage  in  1889;  of  three  years’  labour  of  those  who  in  1888 
reach  the  third  last  and  in  1890  the  last  stage  of  production  ; 
and,  finally,  the  fruits  of  four  years’  labour  of  those  who,  in 
1888,  are  occupied  with  the  second  stage,  and  wiU  reach  the 
final  stage  in  1891.  Now  since  these  goods,  thus  successively 
maturing,  would  provide  for  a very  considerable  portion  of  the 
subsistence  needed  for  the  five  years  1888-92.  it  is  evidently, 
not  necessary  that  the  community,  before  entering  on  a five- 
years’  production  period,  should  have  a stock  of  wealth  equal 
to  the  entire  five  years’  needs.  Or,  if  there  is  such  a stock,  a 
longer  process  than  five  years  can  be  entered  on. 

If  we  look  at  the  same  thing  from  another  side,  and  one 
perhaps  better  suited  to  illustration,  it  is  clear  that,  where 
workers  are  employed  in  stages,  subsistence  need  be  pro- 
vided five  years  in  advance  only  for  those  who  work  on  the 
lowest  or  earliest  stage  of  the  production.  The  workers  on 
the  second  stage,  the  fruit  of  whose  labour  matures  after 
four  years,  require  subsistence  advanced  them  only  for  four 
years.  The  workers  on  the  third  and  fourth  stage  require  sub- 
sistence only  for  three  and  two  years  respectively.  The  workers 
on  the  last  stage,  those  whose  products  will  be  finished  in  a 
year,  require  advances  only  for  a year.  Striking  the  average, 
we  may  say  that,  to  allow  the  entire  body  of  labourers  to 
embark  on  a five  years’  production  process,  all  that  is  required 
is  subsistence  for  = 3 years,  or  a little  more  than 

half  the  period  of  production. 

What  is  true  of  a five  years’  process  is  true  for  all  periods. 
If  we  take  the  trouble  of  calculating  a number  of  concrete 
examples,^  we  very  easily  come  to  an  exact  statement  of  the 
law  relating  to  it  as  follows.  The  stock  of  wealth  mu.st  be 
sufficient  for  half  the  production  period,  plus  half  the  usual 

stage  nenod:  RT’TqF  example,  the  work  of  production  is 
carried  on  only  by  yearly  stages — that  is  to  say,  if  finished 
products  are  turned  out  by  the  process  in  question  only  at 
intervals  of  one  year — then,  in  a five  years’  production  period 
such  as  we  have  been  discussing,  the  stock  of  wealth  must  last 
for  half  the  production  period  {i.e.  for  2|-  years),  and,  beyond 
that,  for  half  what  we  have  called  the  “ stage  period  ” {i.e.  for 
half  a year) ; in  all,  three  years.  If  again  the  stages  of 
^ Hot  to  cumber  the  text  I have  done  this  in  Appendix. 


328  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


production  are  monthly,  so  that  every  month  there  is  an  out- 
put of  finished  products,  the  stock  of  wealth  need  only  he 
such  as  will  last  years  -f  month.  To  put  it  in  general  terms 
yre  may  say : If  the  production  period  PTnhraooa  t.  stapp 
' /periods  the  stock  of  wealth  must  always  he  sufficient  fnr_^l 
^ ^tage  periods.  ~ 

Obviously,  the  greater  x is,  the  smaller  is  the  difference 
between  this  exact  formula  and  the  rough  expression  of 
“ half  tire  production  period  ” ; while  x again  increases  with 
the  length  of  the  production  period  and  the  subdivision  of 
the  stages.  In  a two  years’  process  where  goods  are  turned 
out  once  a year,  the  production  period  embraces  two  stages  : 
the  value  of  the  exact  expression  is,  therefore,  years 

— that  is,  fully  50%  higher  than  the  rough  expression.  If, 
again,  the  process  takes  five  years,  and  the  goods  come  forward 
by  monthly  stages,  a:  = 60,  and  the  exact  expression  has  the 
value  -^=30^  months,  which  shows  very  little  difference 
from  “ half  the  production  period  ” of  .2|-  years.  And  if  the 
production  period  be  ten  years,  and  the  output  be  a weekly 
one,  X will  equal  620,  and  the  exact  expression  will  have  the 
value  of  260^  weeks,  which  practically  coincides  with  the 
rough  expression  of  “ half  the  production  period.”  Now  since, 
in  any  organised  industrial  community,  the  average  process  is 
pretty  long,  and  the  subdivision  into  stages  very  minute- — for 
not  a day  passes  but  finished  products  are  turned  out  of  some 
workshop  or  other — it  mav  be  assumed  without  much  error 
that  a community  mav.  on  the  average,  engage  in  production 
prop.pssps  wbipb  n.rp.  twir.p.  as  long  as  the  period  for  which  the 
nccnmnlated  stock  of  wealth  would  provide  subsistence.^ 

^ Of  course  many  productions  are,  for  technical  reasons,  very  little  divided 
up  into  stages  ; agriculture,  e.g.,  yielding  its  harvests  only  from  year  to  year. 
All  the  same  the  above  formula  will  be  found  to  give  an  approximately  correct 
presentation  of  the  case,  and  we  may  be  the  better  pleased  with  it  that  I do 
not  intend  to  draw  a single  deduction  in  which  anything  depends  on  definite 
figures.  What  I have  to  do  with  is  rather  the  mere  negative  recognition,  lhat 
pie  period  of  time,  for  which  the  accumulated  subsistence  fund  must  contain 
provision,  need  not  ha  so  great  as  the  average  economical  production  period. 


CHAPTEE  VI 


THE  PROFIT  OF  CAPITALIST  UNDERTAKING.  THE  GENERAL 
SUBSISTENCE  MARKET — {continued) 

It  may  be  thought  that  in  the  disquisition  of  last  chapter 
we  have  wandered  entirely  from  our  subject,  the  subsistence 
market.  This,  however,  is  not  the  case.  We  are  here,  indeed, 
at  the  very  centre  of  the  question,  for  we  are  speaking  directly 
of  those  things  which  form  and  regulate  the  supply  anjd / 
demand  on  the  subsistence  market.  Who  are  the  people  ths^ 
require  to  get  subsistence  advanced- them  ? The  answer  is : 
Every  one  who  wishes  to  produce  in  capitalist  methods.^  How 
much  is  required  ?-^^^^^^AirSniount  proportioned  to  the  length  of 
the  production  process.  And  in  what  form  is  it  required  ? — 
Bv  instalments.  Again,  who  are  the  people  that  have  subsist- 
ence to  give  ? — All  owners  of  wealth  who  do  not  consume 
but  “ save  ” it.  How  much  can  they  give  ? — As  much  as  their 
stock  of  wealth  contains.  And  in  what  form  can  they  give 
— Similarly,  in  instalments — in  the  propoTt.ion  that  the 
unfinished  goods  contained  in  their  inventory  successively 
mature.  This  is  the  true  nature  of  what  occurs  in  our  market 
for  means  of  production  and  in  our  market  for  credit — over 
which,  I admit,  the  division  of  labour  and  the  use  of  money 
throw  a veil  very  difficult  to  penetrate. 

Now  at  what  price  will  finished  present  goods  be  exchanged 

^ I repeat  again  that  it  is  quite  true  that,  during  the  period  of  the  national 
production  process,  the  idle  capitalists  and  rentiers  also  must  be  maintained  by 
advances  of  wealth,  and,  indeed,  as  a rule  maintained  at  a pretty  fair  rate.  Their 
claims  on  subsistence,  however,  are  not  causes  but  effects  of  the  condition  of  the 
market  creating  an  agio  on  present  goods.  If  there  is  no  agio,  and  so  no  interest^, 
then  no  one  could  live  in  idleness  as  a rentier  ; he  would  either  have  to  work  or 
positively  consume  his  parent  wealth.  See  above,  p.  820  in  note. 


330  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


for  future  goods  on  thft  snhsist.p.nnft  ma  rl^  ? This  is  the 
question  in  which  our  whole  interest  peculiarly  centres.  To 
answer  it  we  must  describe,  with  more  care  than  hitherto, 
both  the  extent  and,  in  particular,  the  intensity  of  supply  and 
demand.  To-begin  with  Supply.^ 

The  extent  of  the  supply  of  subsistence  we  have  already 
gone  into  with  sufficient  exactness.  It  is  represented  by  the 
toffil  stock  of  wealth  accumulated  in  a community,  exclusive 
/ of  land,  and  after  deduction  of  those  amounts  which  are  con- 
L sumed  partly  by  owners  who  are  getting  poorer,  partly  by 
\ owners  producing  independently  and  spending  either  on 
I themselves  or  by  way  of  advances. 

As  to  the  intensity  of  supply,  it  may  be  assumed  from 
what  was  said  on  p.  315  as  regards  modern  economic 
circumstances,  that,  to  the  capitahsts.  the  subjective  use  value 
of  present  goods  is  not  greater  than  that  of  future  goods.  In 
the  most  unfavourable  case,  then,  they  would  be  willing  to 
give  almost  20s.  present  money  for  20s.  obtainable  in  two 
years,  or,  what  is  the  same  thing,  for  one  week  of  labour  which 
would  bring  them  in  20s.  in  two  years.^ 

Over  and  against  this  supply  of  present  goods  stands,  as 
Demand : — 

1.  An  enormous  number  of  wage -earners  who  cannot 
^ employ  their  labour  remuneratively  by  working  on  their  own 
account,  and  are  accordingly,  as  a body,  inclined  and  ready  to 
sell  the  futiire  product  of  their  labour  for  a.  considerably  less 
amount  of  present  goods.,  Eecurring  to  the  figures  of  our 
illustration  on  p.  313  we  may  assume  that,  for  the  future 
product  of  20s.  value- — the  product  turned  out  complete  as 
the  result  of  a week’s  work,  and  valued  after  two  years  at 
20s. — one  class  of  the  labourers  vdll,  in  the  most  unfavourable 
circumstances,  a.cc.ept  a,  price  or  wage  of  lOs.j,  while  another 
class  will  accept  as  low  a sum  as  5 s.  in  present  money. 

^ It  is  scarcely  necessary  to  note  that  we  have  now  chanp-ftfi  the  names  of  the 
parties  who  enter  the  market.  So  long  as  we  were  considering  the  special  rela- 
tions  of  the  labour  market,  we  thought  of  labour  as  the  commodity  oflfered,  and 
of  the  means  of  subsistence  as  the  equivalent  price  Now,  conversely...  the  means 
of  subsistence  appear  as  the  commodity  looking  for  a market,  or  as  Supply. 

^ Never,  of  course,  quite  20s.  ; otherwise  they  would  have  no  advantage  from 
the  exchange,  and  consequently  no  motive  to  conclude  it ; but,  perhaps,  19s.  6d. 
or  19s.  9d. — a difference  so  insignificant  that  it  may  be  entirely  neglected  in  our 
inquiry. 


CHAP.  VI  THE  GENERAL  SUBSISTENCE  MARKET 


331 


2.  A number  of  independent  producers,  themselves  work- 
ing, who  by  an  advance  of  present  goods  are  put  in  a position 
to  prolong  their  process,  and  thus  increase  the  productiveness 
of  their  personal  labour,  say,  from  20s.  to  24s.  per  week. 
Since  these  persons,  obviously,  get  an  advantage  from  this 

advance  so  long  as  it  enables  them  to  obtain  anything  over 
20s.  a week,  they  will  be  prepared,  where  necessary,  to  give 

a portion  of  the  surplus  product  of  4s.  a week,  as  agio  on 
the  present  goods  to  which  they  owe  this  surplus  product. 

I purposely  here  mention  only  those  undertakers  who  demand 
productive  credit  for  the  assistance  of  their  own  labour,  and 
not  those  who  demand  it  for  the  employment  of  workers 
auxiliary  to  themselves.  The  demand  of  these  latter  forms 
only  a passing  stage : they  take  some  part  of  the  supply,  pro- 
vided by  the  owners  of  wealth,  out  of  the  market,  but  only 
to  offer  it  again,  on  a different  part-market,  to  the  auxiliary 
workers. 

3.  A small  number  of  persons  who,  on  account  of  urgent 
personal  wants,  seek  credit  for  purposes  of  consumption,  and 
are  also  ready  to  pay  an  agio  for  present  goods.^ 

Here  then  we  see  that,  in  these  groups  constituting  the 
demand,  the  circumstances  are  such  that  those  who  demand 
are  willing  and  are  able  to  pay  for  the  present  goods  they 
require,  where  necessary,  by  a larger  sum  of  future  goods  ; that 
is  to  say,  by  an  ^o.  This  being  the  state  of  the  case,  then,  j 
that  all  who  own  the  supply  value  present  and  fntiirp,  goodg/ 
alike,  and  alT who  form  the  demand~value  present  goods  hiahsiA  7 
than  future,  the  determination  of  the  price  simply  depends  oii 
which  side  has  the  numerical  preponderance.  If  more  presen, c 
goods  are  offered  than  are  desired  by  the  united  demand  there 
can  be  no  interest.  The  resultant  market  price,  as  we  know, 
must  always  be  lower  than  the  subjective  valuation  of  those 
would-be  sellers  who  do  not  effect  a sale.  Now  if  the  demand 

^ I might  name,  as  a fourth  group  of  demand,  those  landowners  who  live, 
not  on  the  return  of  their  labour  but  on  their  rents,  and  who,  like  the  labourers, 
get  the  price  of  a future  commodity  sold  by  them — in  this  case  the  productive 
good,  use  of  land — advanced  them  in  the  form  of  subsistence.  I intentionally. 
however,  make  no  mention  here  of  this  group  of  demand  since  there  need  not  be 
in  every  economy  landowners  living  on  their  rents,  and  since,  in  any  case,  the 
emergence  of  interest  which  we  have  to  prove  in  the  text  is  quite  independent  of 
the  simultaneous  existence  of  rent  from  land. 


332  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


is,  numerically,  too  weak,  and  if,  in  consequence,  all  the  present 
goods  offered  cannot  find  a sale,  and  if  all  capitalists — even 
those  who  cannot  find  a sale  for  their  present  goods — value 
20s.  present  money  at  something  like  20s.  future  money,  the 
market  price  of  twenty  present  shillings  cannot  be  higher 
than  twenty  future  shillings,  and  there  is  no  agio  on  present.. 

I goods^  If,  on  the  contrary,  more  present  goods  are  wanted 
1 than  are  offered,  all  the  suitors  cannot  be  supplied.  In 
/ methods  with  which  we  are  famihar  the  weeding-out  process 
\ )f  competition  now  ensues ; those  who  are  able  to  offer  the 
jighest  agiri  fnr  prpgpnt.  good.q  succeed  in  effecting  an  exchange ; 
while  the  others,  be  they  few  or  many,  are  shut  out,  even 
V although  they  may  have  been  ready  to  offer  some  (smaller) 
agio.  But  since  the  market  price  must  always  be  higher 
than  that  bid  by  the  excluded  buyers,  and  since  this  latter 
contains  an  agio,  jt  is  clear  that,  in  the  circumstances.  thC' 
market  price  also  must  contain  an  agio — great  or  small — for 
present  goods. 

Now  it  can  be  shown — and  with  this  we  come  to  the 
goal  of  our  long  inquiry — that_the  supply  of  present  good,s 

must  be  numerically  less  than  the demand.  The  supply, 

even  in  the  richest  nation,  is  Limited  by  the  amount  of  the 
people’s  wealth  at  tne  moment.  The  demand,  on  the  other 
^ hand,  is.  pra.cticallv  infinite ; it  continues  at  lea.st  so  long  qs 

Vthe  return  to  production  goes  on  increasing  with  the  extensioii 
of  the  production  process,  and  that  is  a limit  which,  even  in 
the  richest  nation,  lies  far  beyond  the  amount  of  wealth 
possessed  at  the  moment. 

Where  a people,  as  in  the  case  of  Eoscher’s  poor  fisher- 
folk,  live  from  hand  to  mouth,  it  goes  without  saying  that 
they  will  be  eager  to  acquire  the  first  hardly  saved  stocks 
which  allow  them  to  make  boats  and  nets,  and  their  exchanges 
will  be  made  with  an  agio  against  futni’e  goods.  But  among 
comfortahly-off  and  wealthy  people  the  position  is  different,  not 
in  kind,  but  in  degree.  If  the  stock  of  wealth  be  sufficient 
to  maintain  the  population  during  an  average  one  year’s 
production  period,  every  one  will  wish  , to  engage  in  a two 
years’  process,  with  its  greater  productiveness,  and,  the  stock 
of  wealth  not  being  sufficient  to  advance  subsistence  to  every- 
body for  two  years,  there  will  be,  as  before,  bidding  against 


CHAP.  VI  THE  GENERAL  SUBSISTENCE  MARKET 


333 


each  other ; the  circle  of  suitors  will  be  weeded  out ; and  the 
agio  on  present  ponds  will  appear,  Nor  does  it  make  any 
rlifference  if  the  community’s  wealth  is  sufficient  fnr  an  average 
of  five  or  ten  years’  production  period.  Since,  the  provision 
for  human  wants  would  be  still  more  abundant  if,  instead 
of  five  or  ten  years,  six  or  eleven  years  were  the  average 
periods,  men  will  always  wish  to  embark  on  these  more 
fruitful  methods,  will  compete  to  obtain  the  subsistence  that 
is  not  sufficient  for  aU,  and  will  thereby  inevitably  call  forth 
an  agio  for  present  goods. 

Interest  and  Agio  must  appear.  Assume  for  a moment 
that  they  do  not.  Present  goods  and  future  goods  are 
exchanged  on  the  great  subsistence  market  at  par,  and  the 
labourers,  for  the  week’s  work,  get  the  whole  value  of  their 
future  product  paid  down  to  them  in  present  goods.  Say 
that  the  average  production  period,  assuming  the  nation  to  be 
enormously  wealthy,  is  ten  years : that  the  week’s  work  con- 
sequently yields  40  s.  and  that  the  labourer  receives  the  whole 
of  this  as  wage.  What  will  happen  ? The  undertaker  who 
empiny.s  people  to.  work  with  him  in  a ten  years’  process  makes, 

no  profit  outside  of  his  own  personal  labour.  For  the  40s.,  which 
the  labour  of  his  people  yields  him  at  the  end  of  the  produc- 
tion period,  has  already  been  wholly  expended  as  wage.  But 
how  if  he  extends  the  production  period  stiU  further  ? If  the 
week’s  labour  has  returned  40s.  in  the  ten  years’  process, 
experience  tells  us  it  will  return  more  in  a twelve  years’ 
process,  say  44s.  In  stiU  longer  processes,  say,  fifteen  years, 
it  may  return  perhaps  48s.  Now  as  the  undertaker,  by 
hypothesis,  can  buy  present  goods  at  par  on  the  subsistence 
market,  it  would  be  foolish  of  him  not  to  extend  the  produc- 
tion period  for  him.self  anrl  his  emplnyt^s  tn  fiftp.pn  yPAr?;  If 
he  does  so,  he  pays  his  workers  out  of  the  borrowed  advances 
40s.,  the  price  on  the  labour  market : in  fifteen  years  he 
recovers  48s.  from  the  product;  from  that  sum  he  pays  back 
the  advanced  40  s.  at  par,  and  has  remaining  the  respectable 
profit  of  8s.  out  of  each  week  of  labour.  And  with  this  we 
have  the  “ surplus  value.”  the  profit  on  capital. 

To  prevent  its  appearance  the  labourer’s  wa.gp  wnnirl 

to  be  raised  from  40s to  48s.  But  this  is  not  possible. 

For  the  weU-known  levelling  tendencies  of  competition  do  not 


334  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


allow  wages  to  rise  permanently  in  any  isolated  branch — so 
long  as  it  does  not  presuppose  peculiar  personal  qualities — 
inasmuch  as  there  will  at  once  be  a rush  from  less  paying 
branches  into  any  particularly  paying  branch.  Rut  neither 
is  a general  rise  of  wages  to  48s.  possible,  bpoansp.  the  eyisten-t 
stock  of  wealth  is  only  suflSicient  for  an  a.verage  ten  years’ 
period.  The  extension  of  the  process  to  fifteen  years,  conse- 
quently, can  occur  only  in  isolated  cases ; the  bulk  of  pro- 
ductive employments  must  continue  the  ten  years’  process 
which  yields  only  40  s.  per  week,  and  cannot,  therefore,  permit 
of  any  higher  wage  than  40  s, 

On  the  other  hand,  it  is  obvious  that  something  else  will 
make  its  appearance.  However  sharp  undertaker  A may  be 
in  borrowing  money  free  of  interest,  and  securing  a nice 
surplus  value  of  8 s.  per  week  of  labour,  undertakers  B,  C,  D 
and  E will  not  be  far  behind.  The  desire  to  prolong  the 
production  period,  and,  with  that,  the  demand  for  increased 
advances  of  subsistence,  will  become  general : it  will  not  be 
possible  to  supply  this  increased  demand  from  the  limited 
funds  of  subsistence : and,  finally,  the  weeding  out  of  com- 
y petition  will  begin  among  the  classes  who  constitute  the 
V demand.  Here,  then,  we  have  the  agio  again  appearing  in 
the  universal  market  price  of  present  goods,  from  which,  by 
hypothesis,  we  had  for  the  moment  banished  it. 

And  this  result,  as  regards  the  normal  and  really  economic 
provision  of  society,  is  no  less  healthy  than  it  is  necessary. 
Tbp.  po.ssihib'ty  of  obtaining  mp.a.ns  of  subsistence  free  of  agio 
would  be  certain  to  tempt  undertakers  into  Jmmgderatfi_ex.* 
tension  of  the  production  period.  If  this  were  to  occur  only 
partially  and  in  a few  branches  of  production,  naturally  the 
limited  stocks  of  subsistence  would  leave  so  much  less  for 
the  other  branches  of  production ; these  latter  would  have  to 
curtail  their  processes  unnaturally ; and  there  would  ensue  a 
deficiency  in  the  social  proyLsinu-  which  would  outweigh  the 
increased  return  got  from  the  favoured  branches  through  the 
immoderate  extension  of  their  processes.^  But  if  the  excessive 

1 The  deflciepcY  is  greater,  because  it  is  well  confirmed  by  experience  that 

the  sHrplii.q  return  constantly  tends  to  decrease  as  the  production  ]3eriod  is 
extenjded.  (See  above,  p.  84.)  The  difference  between  the  return  which  can 
be  obtained  in  a five  years’,  and  that  which  can  be  obtained  in  a ten  years’ 


CHAF.  VI  THE  GENERAL  SUBSISTENCE  MARKET 


335 


extension  were  to  be  introduced  all  over,  the  communitv!s 
stock  of  subsistence  would  come  to  an  end  sooner  than  the 
fruits  of  processes  thus  unduly  extended  could  mature ; there 
would  be  deficiency  in  provision,  want,  and  distress ; famine 
prices  would  recall  the  misdirected  natural  powers,  and  put 
them,  with  difficulty,  to  supply  provision  for  the  moment.  All 
this  could  not  happen  without  serious  disturbance,  expense, 
and  loss. 

liow  the  constant  presence  of  the  agio  on  present  goods  ^ 
^ like  a self-acting  drag  on  the  tendency  to  extend  the  pro- 
pprird  ; without  checking  it  all  at  once  it  makes  it 
more  difficult,  and  more  difficult  in  proportion  to  the  projected 
length  of  the  process.  Extensions  which  would  be  harmful  as 
regards  social  provision  are  thus  made  economically  impossible. 
Moderate  extensions  over  the  average  process,  however,  are 
not  absolutely  prevented,  but  are  limited  to  those  branches 
where,  from  peculiar  economic  or  technical  circumstances,  the 
productiveness  that  goes  with  the  extension  of  the  period  is 
so  great  that  they  can  bear  the  progressive  burden  of  the 
agio.  Branches,  again,  where  longer  processes  are  somewhat, 
birt  only  a little,  more  productive,  are  tempted  to  escape  the 
burden  of  agio  by  recurring  to  periods  under  the  average. 
Thus,  finally,  under  the  influence  of  the  agio,  the  total  fund  of 
subsi.stence  is  divided  out  automatically  among  the  individual 
branches  of  production,  in  such  amounts  that  _each  branch 
adopts  that  length  of  process  which — in  the  given  condition 
of  the  fund — is  most  favourable  to  the  total  proviaiiiQ..^ 

production  period,  is  greater  than  the  difference  between  the  returns  of  a ten 
, and  a fifteen  years’  period.  If  now,  in  a communit}^  where  the  stock  of  wealth 
is  such  as  to  allow  of  an  average  ten  years’  period,  one  branch  is  forced  to  limit 
its  own  period  to  five  years  because  another  branch  has  extended  its  period  to 
fifteen  years,  the  gi-eater  difference  is  lost  to  the  community,  and  the  lesser  one 
is  won.  The  total  result  of  such  a procedure  is,  therefore,  uneconomic. 

^ The  fact  that  tlie  agio  stands  at  a certain  height  may  now  and  then  lead 
to  the  appearance  of  there  being  a deficiency  in  rem.unerative  opportunities  of 
emploj'ment,  and  a “glut  of  capital.”  The  truth  is  that  there  is  always  a 
surydus  of  remunerative  opnortunities  of  employment,  and  a (ieficiency  of 

capital ; only  that  the  high  agio,  which  is  the  result  of  the  deficiency  of  capital, 
excludes  a mass  of  remunerative  opportunities  as  not  remunerative  enough 
economically.  It  is  exactly  the  same  as  when,  in  a year  of  bad  crops,  sufficient 
buyers  cannot  at  the  moment  be  found  in  some  one  market  for  the  strongly 
appreciated  grain,  on  account  of  the  price  being  so  high.  It  cannot  he  truly 
said  that  there  is  a surplus  of  grain  and  a defieiptiey  of  demand  : on  the  contrary. 


336  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


At  this  point  I think  we  may  congratulate  ourselves  on 
having  finished  one  of  the  most  important  demonstrations  in 
the  scope  of  our  present  task.  It  fully  confii’ms  those  infer- 
ences which  we  had  drawn  from  the  nature  of  Jdie  produerivp 
instrument  Labour  as  a future  commodity  and  it  gives  us  the 
key  to  the  explanation  of  the  much-disputed  “ Surplus  Value  ” 
of  the  undertakers.  It  shows  that,  in  the  great  combined 
subsistence  market  of  society,  present  goods  must  have  an 
agio,  as  legitimate  consequence  of  the  constant  fact  that 
present  goods  are  more  useful,  and  are  more  desired,  than 
future  goods,  and  that  they  are  never  present  and  offered  in 
unlimited  abundance.  This  ngin^  thus  organically  necessary,  is 
given  directly  on  the  loan  market  in  the  shape  of  interest, 
while,  on  the  labour  market,  it  is  given  in  the  form  of  a 

price  for  labour  which  remains  under thp  amonid  ih.;. 

future  product  of  labour,  and  which,  on  that  account,  leaves 
room  for  the  accretion  of  a surplus  value. 

/ The  same  principles  as  regulate  the  price  of  the  productive 
instrument.  Labour,  regulate  the^pricg  of  the  originaI_pxodnctiv£ 
instrument  “ Nature.  ” or  those  services  rendered  by  the  earth 
which  possess  an  economical  character — generally  called,  from 
their  chief  representative.  Uses  of  Land  {Bodennutzungen).  If  a 
piece  of  land — after  deducting  the  share  of  the  complementary 
productive  goods  which  co-operate — will  produce  in  one  year 
100  bushels  of  corn,  or  will  rear  in  five  years  100  cwts.  of  beef, 
no  one  would  be  willing  to  pay  the  par  value  of  100  present 
bushels  of  corn  or  100  present  cwts.  of  beef  for  the  use  of  the 
land,  when  these  last-named  amounts,  employed  in  lengthening 
the  production  process,  or  directly  exchanged  against  future 
goods  on  the  loan  market,  or  spent  in  buying  labour,  could 

^obtain  more  than  the  100  future  bushels  or  cwts.  Thus  TTrp.s 
of  Land,  whpn  PYr.banged  against  present  goods,. cannot  escape 
a deduction  in  price  any  more  than  can  the  productive  good 
Labonr, 

And,  finally,  on  exactly  similar  grounds  the  very  same  i§ 
prip.p  nf  TTitp.rmerha.tp.  Prod  nets.  Concrete  capital 

there  is  so  great  a deficiency  of  grain  that,  after  the  weeding  out  which  has 
resulted  from  the  war  of  competition,  only  a very  small  part  of  the  demand 
finds,  economically,  admittance  to  the  scanty  stocks. 


CHAP.  VI  THE  GENERAL  SUBSISTENCE  MARKET 


337 


generally — raw  materials,  tools,  and  so  on — is  bought  and  sol4 
at  a price  w]n'ch_reTTia.ins  under  the  amount  of  the  fotuxn. 
product  resulti^  froinjii.  It  would  be  a very  easy  matter  to 
prove  this  point  by  point,  as  we  did  with  the  price  of  labour, 
but  the  case  of  intermediate  products  is  so  closely  allied  that 
it  seems  to  me  quite  unnecessary. 

Speaking  generally,  the  importance  of  the  demonstration 
we  have  just  completed  does  not  consist  in  its  proving  that 
productive  instruments  are  bought  at  a price  which  remains 
under  the  price  of  their  future  product,  for  this  is  an  old  and 
familiar  fact  taught  not  only  by  daily  experience  but  by  the 
theory  of  the  most  diverging  schools.  The  really  important 
result  of  our  investigations  is,  that  this  well-known  fact  hag 
been  shown  to  be  the  necessary  outcome  of  the  same  causes  as 

oive  present  goods  the  superiority  in  value  over  future  goods. 

A few  chapters  back  I assented  to  one  feature  of  the  Socialist*^ 
interest  theory — that  which  explains  surplus  value  from  the  low 
price  at  which  productive  powers  are  purchased  I may  now 
add  wherein  the  theory  is  wrong.  It  is  wrong,  first,  in  ex- 
plaining interest  by  the  cheap  purchase  of  lahour  only.  Interest 
is  got  as  much  by  the  cheap  purchase  of  uses  ot  land. 
Quantitatively,  of  course,  the  profit  from  buying  labour  bulks 
much  more  largely  in  importance.  The  profit  from  the 
“ cheap  ” purchase  of  intermediate  products  need  not  be 
mentioned  here ; it  is  explained  on  the  same  principles  as 
the  profit  from  the  purchase  of  the  original  productive  powers. 

Second-, as  I have  already  said  on  p.  301.  the  purchase  is  not 
so  cheap  as  it  seems  to  be.  because  the  object  of  purchase  is 
measured  in  (undervalued)  future  goods,  while  the  price  is 
measured  in  (full- valued)  present  goods. 

And,  finally,  the  fact  that  the  price  of  labour  is  relatively 

low. -is  not  the  naked  result  of  an  eyp]m'ta.tinn  in  which  want 
forces  the  labourers  to  acquiesce.  To  som,e  extent,  although, 
probably,  to  a less  extent,  the  same  would  be  the  case  without 
any  compulsion,  if  wealth  were  divided  almost  equally  among 
all.  To  prove  this  let  us  recur  for  a moment  to  the  considera- 
tion of  those  primitive  circumstances  which  I hurried  over  as 
not  immediately  appropriate  to  modem  economy.^  Suppose  a 
society  where  all  are  owners  of  wealth,  and  all  independent 
' See  above,  pp.  316,  317. 

Z 


338  THE  PROFIT  OF  CAPITALIST  UNDERTAKING  bk.  vi 


producers.  Their  labour,  embodied  in,  say,  a two  years’  process, 
is  moderatively  productive.  Suppose  that,  in  this  society — 
which  is  not  a poor  one — a certain  producer  possesses  means 
enough  to  make  it  possible  for  him,  either  to  maintain  himself 
for  six  years,  or  to  maintain  himself  and  one  worker  for  three 
years.  The  product  of  a year’s  labour,  we  shall  suppose,  is  as 
follows: — in  a two  years’  production  period  £52  (at  20s.  per 
week),  in  a three  years’  process  £60,  in  a six  years’,  £65.^  If 
this  man  employs  his  wealth  in  lengthening  the  period  of  his 
production  without  employing  an  assistant,  he  obtains  by  his 

six  years’  laWir  6 x 65=::£390.  If  he  employs  an  assistant, 

and  works  along  with  him  in  a three  years’  proeess,  he  reaps 
from  his  own  labour  in  six  years  6 x 60  = £360,  while  the 
same  amount  is  produced  by  the  labour  of  his  employ^.  How 
much  can  he  pav  this  employe  in  wages  ? 

Obviously  it  is  quite  impossible  to  give  him  the  full  £360 
(that  is  £60  per  year)  in  wage,  for  this  would  be  to  inflict 
positive  injury  on  himself.  Working  by  himself  he  would 
have  obtained  in  six  years  £390  ; by  employing  another  he 
gets  only  £360.  To  avoid  loss  he  must,  therefore,  keep  back 
of  the  product  of  the  employ^  at  least  £30.  and,  thus _he_ will 
be  able  to  pay  him  at  mo.st  £330.  or  £55  per  .ye^i.  If  he 
does  so,  the  whole  advantage  of  the  business  is,  obviously,  still 
on  the  side  of  the  labourer.  The  undertaker  gains  nothing, 
■•'out  the  labourer  gains,  inasmuch  as  he  now  earns  £55 
instead  of  the  £52,  which  is  aU  he  could  have  earned  as  an 
independent  undertaker  with  a two  years’  process.  In  these 
cireumstanees  the  idea  of  exploitation  is  out  of  the  question : 
so  is  the  idea  of  a forced  agreement : and  still  the  wage, 
although  stretched  in  favour  of  the  labourer  to  the  extremeSt 
limit  of  the  economieally  possible,  remains  under  the  full 
amount  of  his  future  product.  Surely  this  is  a clear  enough 
proof  that  there  is  some  other  reason  for  the  “ cheap)-!!, buying 
of  labour  than  compulsion  and  exploitation! 

* 1 assume  that  the  figures  of  the  return  in  a six  years’  period  are  a little,  but 
not  very  much  higher  than  those  in  a three  years’,  in  harmony  with  the  experi- 
ence, so  often  alluded  to,  that  gradual  extension  of  the  production  period  tend^ 
to  always  decreasing  surplus  returns. 


CHAPTEK  VII 


INTEREST  FROM  DURABLE  GOODS 

Material  goods  are  of  use  to  mankind  through  the  action  of 
the  natural  powers  that  reside  in  them,  or,  as  I have  expressed 
it  in  another  place,  through  the  rendering  of  their  material 
services.  On  the  nature  and  importance  of  these  material 
services  I have  said  enough  in  my  former  work,^  and  I shall 
repeat  only  a few  considerations  which  seem  necessary  to 
connect  what  was  then  said  with  the  subject  now  before  us. 

M^Tiy  gnndfi  ciT-Q  gr'  pn-ngfli.nfpfl  tp.ch u i rally  as  to  he  capable 

of  rendering  one  single  service,  and  in  that  service  to  exhaust 
the  whole  of  their  useful  content.  These  are  what  we  call 
Pprishahlp.  goods.  In  them  the  good  and  the  service  coincide. 
Many  other  goods,  again,  are  able  to  render  several  successive 
services.  We  call  these  Durable  goods : tools,  dwellings, 
clothes,  land  are  instances  of  such.  Here  the  single  service 
forms  a smaller  economical  unit  clearly  distmguished  from 
the  good  itself,  and  is  capable  of  obtaining  a certain  economical 
independence.  To  afford  a single  and  limited  act  of  satis- 
faction, a single  service  may  be  detached  from  the  useful 
content  of  the  good.  Various  services  of  the  same  good 
may  be  independently  and  differently  disposed  of  Sinp-le_ 
ser\~ices,  or  groups  of  services,  may  be  indenendentlv  trans- 
ferred, gifted,  or  sold  to  different  people,  as  we  see  every  day 
in  the  famihar  legal  contracts  of  Letise  and  Hire.  Such 
services  may  obtain  an  independent  price,  and,  as  this  of 
course  presupposes,  an  independent  value.^  It  is  the  value  of^ 
these  material  ser\ices  that  now  claims  our  attputimi 

^ Capital  arid  Interest,  p.  219.  Also  Rechte  und  Verhdltnisse,  p.  57. 

- Are  MatfiiHal  .Sprvippg  thpmapIvRs  “ Goods”  ? — Many  writers  will  have  it  so, 


340 


INTEREST  FROM  DURABLE  GOODS 


BOOK  VI 


This  value  cannot  be  subject  to  any  other  laws  than  those 
which  regulate  the  value  of  goods  in  general  A service 
obtains  value  exactly  as  a good  does — that  is,  by  the  satisfac- 

as  Hermann  {Staatsvnrthschaftliche  Unters^ichungen,  second  edition,  p.  109),  or 
Alenger  {Gnindsatze,  p.  132).  Other  recp^^'  like  Sax  {Grundlegung, 

p.  209)  and  R.  Meyer  {Das  Wesen  des  Einkommens,  pp.  155,  168),  emphatically 
exclude  the  services  themselves  from  the  . conception-  of  (Sax  speaks 

primarily  of  personal  services,  but  what  is  true  of  them  must  logically  be  true 
of  material  services. ) To  my  mind  the  matter  appears  to  stand  as  follows.  First 
of  all,  the  whole  question  is  not  one  of  scientific  knowledge,  but  simply  one  of 
terminology.  And  provided  that  the  nature  and  the  place  of  material  services 
in  economics  were  really  and  properly  recognised,  in  the  end  it  would  not  much 
matter  whether  the  name  Good  was  attached  to  them  or  not.  Those  authors 
who  refuse  to  recognise  material  services  as  goods  appear  to  me,  how'ever,  to 
have  some  notions  that  are  not  really  and  properly  correct.  Thus  Meyer  (pp. 
156,  157,  note  4)  denies  to  material  services  the  character  of  economic  means, 
and  explains  them  rather  as  “satisfactions  of  want.”  How  the  material  service, 
as  I understand  it.  is  a real  mean  towards  the  satisfaction  of  want,  not  that 

satisfaction  of  want  itself.  It  stands  as  independent  intermediary  between  the 
good  from  which  it  comes,  and  the  satisfaction  of  want  which  it  is  intended  to 
cause  but  does  not  by  any  means  always  cause.  If,  e.g.,  I hire  an  oven  for  the 
baking  of  bread — that  is  to  say,  buy  its  use  or  its  material  service — what  kind  of 
thing  is  it  I really  have  bought?  Have  I directly  bought  the  satisfaction  of 
want,  the  allaying  of  hunger? — Certainly  not.  Or  the  oven  itself? — No.  Or, 
perhaps,  the  bread  that  is  to  be  made  by  the  oven  ? — Again,  no.  But  what  I 
have  bought  is  just  one  material  service,  or  group  of  services,  of  the  good  called 
Oven ; these  services  are  means  to  the  production  of  bread,  and  thus,  beyond  that, 
to  the  satisfaction  of  one  of  the  needs  of  subsistence.  The  material  services  are, 
therefore,  true  and — according  to  the  sense  indicated  in  the  text — independent 
economical  instruments  and  objects. — If  now,  with  the  view  of  settling  the 
terminological  question,  we.  inqnire  as  to  the  position  of  the  material  services 
among  the  other  eco-nomical  instrument,  we  seem  to  arrive  at  the  following. 
There  can  be  no  doubt  as  to  the  inventory  of  the  causes  of  wellbeing, — the  causes 
which  we  summon  to  the  satisfaction  of  our  wants.  Our  wellbeing  i.s  furthered, 
on -the  one  aide,  bv  versons  who  are  useful  to  us  (such  as  teachers,  guardians, 
clergymen,  artists,  workers,  domestics,  etc.),  and,  on  the  other  side,  by  useful 
things.  And  the  nee  of  both  comes  to  us  through  the  exertion  of  their  useful 
powers,  — that  is,  through  useful  services.  In  the  sphere  of  material  instruments 
of  wellbeing  we  treat  both  the  things  and  their  services  as  economical  objects  : in 
the  sphere  of  personal  instruments  of  wellbeing,  since  the  abolition  of  slavery, 
we  do  not  treat  the  useful  persons  themselves,  but  only  their  services,  as 
economical  objects.  Thus  the  scheme  of  our  economical  means  of  satisfaction 
w'ould  receive  something  like  the  following  shape  : 

Economical  Means  of  Satisfaction 

(Useful  Persons)  Material  Goods 

Personal  Services  Material  Services 

And  now  it  is  a question  of  appropriate  terminology  to  which  of  these  categories 
the  name  “Good”  should  be  attached.  Personally  I believe  that  the  science 
has  great  need  of  one  short  expression  which  would  embrace  all  kinds  of  means  of 


CHAP.  VII 


THE  GOOD  AND  ITS  SERVICES 


311 


tion  of  some  want  being  dependent  npoii  it — and  the  amount 
of  its  value  is  measured  by  the  importance  of  the  dependent 
want — that  is,  by  the  amount  of  the  marginal  utility  which 
may  be  obtained  from  a ser\dce  of  such  kind  and  such  extent. 

Thus  there  is,  naturally,  an  intimate  relation  between  the 
value  possessed  by  the  material  good  itself,  and  the  value 
possessed  by  its  services.  The  nature  of  this  relation  scarcely 
requires  explanation ; — a material  good  obviously  has  the'^ 
vahip.  Rs-tba-snm  of  all  its  services.  If  a good  is  capable 
of  rendering  ten  services,  and  if  the  satisfaction  of  a certain 
want  depends  on  each  of  these  services,  it  is  obvious  that  what 
depends  on  the  possession  of  the  good  is  the  receiving  of  these 
satisfactions,  and,  indeed,  of  all  the  ten  satisfactions  from 
which  the  services  get  them  value. 

Katurally  the  case  of  perishable  goods  is  the  simnlesb 

Here  the  value  of  the  single  service  coincides  purely  and 
simply  with  the  value  of  the  good  itself.  The  value  of  the 
service  rendered  me  by  a cartridge  is  identical  with  the  value 
of  the  cartridge.  The  case  of  durable  goods  is  more  compli- 
cated. We  have  always  to  think  of  the  value  of  a durable 
^ood  as  a compound  amount ; as  made  up  of  the  importance 
of  more  or  less  numerous  wants  to  which  it  ministers  by  its 
successive  services ; or — to  put  it  another  way — as  made  up 
of  the  individual  values  of  the  services  on  which  those  satisfac- 
tions depend.  If  a farmer  is  calculating  the  use  value  of  a 
threshing-machine  with  a view  to  buying  it,  he  will  take  into 
account  the  time  the  machine  will  last  and  the  work  it  is 
capable  of  doing,  and  will  calculate  from  that  how  many 
services  it  will  render,  and  how  much  each  service  will  be 
worth  to  himd 

satisfactioD.,  Now,  since  the  word  “good”  is  quite  suitable  for  this  purpose,  and 
has  already  long  been  used  for  this  purpose,  I see  no  reason  why  it  should  now 
he  deposed.  Of  course  there  is  quite  as  strong  a need  to  keep  the  material  services 
in  their  turn  separate  from  the  material  goods  which  bear  these  services.  But 
this  can  he  done,  both  simply  and  sufficiently,  bv  in.stituting  the  distinction,  inside 
the  universal  conception  of  the  “Good,”  between  “Material  Goods”  and  “Material 

Services.” — Things  like  Eights,  Kelations,  Properties,  would,  for  good  reasons, 
find  no  room  even  in  the  widened  conception. 

^ The  perception  of  the  above  is  made  very  difficult  bv  the  usual  method  of 
valuation  according  to  “Costs”  which,  naturally,  is  always  directed  to  the  unit 
of  goods  as  a whole  (see  my  Reehte  und  Verhdltnisse,  p.  64,  note  1).  The  reader, 
however,  who  has  followed  our  conception  of  what  the  nature  of  the  law  of  costs 


342 


INTEREST  FROM  DURABLE  GOODS 


BOOK  VI 


In  this,  however,  there  may  be  another  comphcation.  If  the 
services  of  the  durable  good  be  exhausted  in  a short  space  of 
time,  the  individual  services,  provided  they  are  of  the  same 
quality — which,  for  simplicity’s  sake,  we  assume — are,  as  a 
I'ule,  equal  in  value,  and  the  value  of  the  material  good  itself 
is  obtained  by  multiplying  the  value  of  one  service  by  the 
number  of  services  of  which  the  good  is  capable.  But  in  the 
case  of  many  durable  goods,  such  as  ships,  machinery,  furniture, 
land,  the  services  rendered  extend  over  long  periods,  and  the 
result  is  that  the  later  services  r.a,nnnt.  hpi  rendered  _nr  at  Ipast 
cannot  be  rendered  in  a normal  economic  way,  before  a long 
time_has_expired. 

As  crmseqnenc.e.  the  value  of  the  more  distant  material 
services  suffers  the  same  fate  as  the  value  of  future  goods..  A 

material  service,  which,  technically,  is  exactly  the  same  as  a 
service  of  this  year,  but  which  cannot  be  rendered  before  next 
year,  is  worth  a httle  less  than  this  year’s  service ; another 
similar  service,  but  obtainable  only  after  two  years,  is,  again, 
a little  less  valuable,  and  so  on  ,*  the  value  of  the  remritf) 
services  decreasing  with  the  remoteness  of  the  period  at  which 
they  can  be  rendered-  Say  that  this  year’s  service  is  worth 
100,  then  next  year’s  service — assuming  a difference  of  5% 
per  annum — is  worth  in  to-day’s  valuation  only  95*23  ; the 
third  year’s  service  is  worth  only  90*70;  the  fourth  year’s 
service,  86*38  ; the  fifth,  sixth,  seventh  year’s  services,  respect- 
ivelyj  worth  82*27,78*35,  74*62  of  present  money.  The  value 
of  the  durable  good  in  this  case  is  not  found— by.  multiplying 
the  value  of  the  current  service  by  the  total  number  of  services. 
but  is  represented  by  a smn  nf  services  decieafiing  in  value. 
If  the  current  year’s  use  of  a machine  is  worth  100,  and  the 
machine  is  capable  of  doing  work  of  equal  quality  for  five  years 

is,  and  has,  consequently,  recognised  that,  even  where  goods  seem  to  get  their 
value  from  their  costs,  the  utility  of  the  goods  always  stands  in  the  background  as 
the  true  source  of  value,  and  that,  jn  any  case,  the  “costs  ” must  always  be  in 
harmony  with  the — independently  established — marginal  utility  of  the  goods,  will 
not  be  misled  by  any  appearance  to  the  contrary.  Even  in  the  consideration,  for 
instance,  of  whether  a durable  good  in  general  is  worth  its  cost,  and  whether, 
consequentljq  we  should  produce  or  buy  it,  we  must  form  an  opinion  to  ourselves 
as  to  its  utUity,  and  I should  he  puzzled  to  know  how  this  opinion  is  to  be 
formed  if  not  on  the  basis  of  the  value  which  the  material  services  of  the  good — 
singly  and  taken  together — have  for  us. — On  the  whole  question  treated  in  the 
text  see  also  my  Rechte  und  Verhdltnisse,  pp.  61-68. 


CHAP.  VII  DISCOUNTING  OF  FUTURE  SERVICES 


343 


more,  the  machine  is  not  worth  6 x 100  = 600,  hut  100  + 96'23 
+ 90-70 + 86-38  + 82-27  + 78-35  = 532-93.1  Now  what 
happens  during  the  working  life  of  this  machine  ? — In  the  first 
j-ear  of  its  use  the  owner  realises  the  “ current  ” service  with 
its  value  of  100.  Naturally  this  ser-vdce,  thus  consumed  or 
rendered,  comes  off  the  value  of  the  machine  (which  we  may 
call  the  “ hearer  of  the  use  ”),  and  the  good  suffers  a loss  of 
value.  Eiit  this  loss  of  value  cannot  lie  quite  so  great  as  the 
value  of  the  ser-ydce  rendered  and  deducted.  It  is  partly  com- 
pensated hy  the  increased  value  of  the  services  that  still  remain 
embodied  in  the  machine.  That  particular  ser-vice  which,  at 
the  heginning  of  the  year  of  use,  figured  as  “ next  year’s,”  and 
had  a value  of  only  95-23  in  present  money,  figures  hy  the 
end  of  the  year  as  “this  year’s  use”;  it  has  advanced  one  year 
nearer  maturity  and  grown  into  the  full  present  value  of  100. 
Shnilarly  the  former  third  year’s  service  has  now  become  next 
year’s,  and  its  value  has  grown  from  90-70  to  95-23  : the  fourth, 
fifth,  and  sixth  year’s  services  have  passed  into  the  rank  and 
value  of  third,  fourth,  and  fifth  year’s  services.  Behind  each 
of  these  latter  services  there  remains  another  service  ready  to 
take  its  place,  and  entirely  supply  it.  It  is  only  the  last,  the 
sixtL  veaj’.S-  service,  that  is  not  replaced  bv  any  succeeding  one.^ 
And  thus  we  find  that  the  loss  of  value  which  the  durable  good 


^ TPiPtiP  ar<>  based  Oil  the  assumption  that  the  whole  year’s  utility  is 

obtained  all  at  once,  and,  indeed,  obtained  in  anticipation  at  the  beginning  of 
the  year  ; e.g.  by  hiring  the  good  at  a year’s  interest  of  100  payable  on  each 
1st  January.  If,  on  the  other  hand,  the  year’s  use  can  only  be  had  at  the  end 
of  the  year,  a valuation  undertaken  at  the  beginning  of  the  year  will  show  figures 
not  inconsiderably  lower.  , That  is  to  say,  on  1st  January  1888,  the  present  year’s 
use  which  will  be  obtained  only  by  31st  December, — that  is,  practically,  a whole 
year  later, — will  not  be  valued  at  the  full  100,  but  at  95-23  only  ; and  again  the 
“next  year’s  use,”  that  obtainable  31st  December  1889, — that  is,  practically,  two 
years  later, — will  be  valued  at  90-70,  and  so  on.  Now  this  shows,  for  the  whole 
good,  a sum  of  value  of  95  -23  + 90-70  + 86  -38  + 82  '27  + 78 -35  + 74 -62  = 507  -55.  Jk 
finally,  the  utility  were  always  obtainable  in  the  middle  of  the  year,  or,  what 
comes  to  the  same  thing,  were  to  be  spread  equally  over  the  whole  year,  the 
figures  would  be — for  a valuation  taken  on  the  1st  January — 97-56  + 92-85  + 38-38 
+ 84'12  + 80-07  + 76-21  = 519‘19. — That  the  figures  should  alter  according  as  the 
date  of  the  valuation  stands  nearer  or  farther  from  the  date  of  obtaining  the 
utility,  is  an  entirely  natural  thing,  and  one  quite  familiar  in  financial  life. 
The  value  of  pap£r — which  is  just  a “durable  good”  with  annual  uses — always 
stands  a little  higher  shortly  before  the  interest  or  dividend  terms  than  some  time 
before.  I may  note  that  the  above  figures  are  taken  as  before  from  Spitzer’s 
Tables,  and  are  based  on  an  interest  rate  of  5%. 


.344 


INTEREST  EROM  DURABLE  GOODS 


BOOK  VI 


siiffipTR  during  the  yp-ar’s  iisp,  turns  ri-.it 


initial  value  of  the  most  remote  service  inherent  in  the  goo^. 
This  value,  of  course,  is  less  than  the  value  of  the  present 
service,  the  service  known  as  the  “ current  return  ” : and 
thus  it  happens  again  that,  to  the  owner  of  the  durable  good- 
something  of  the  current  return  always  remains- -overL  as  net 
profit  or  net  interest,  after  deducting  the  loss  of  value  which 
the  good  suffers  during  its  year  of  use  (that  loss  of  value 
familiarly  known  as  “ wear  and  tear  ”).  This  “ something  ” 
amounts  exactly  to  the  cpstomary  percentage  of  the  total  value 
(the  “ capital  value  ”)  of  the  parent  good,  the  bearer  of  the 
utility — a coincidence  which  it  is  the  easiest  thing  in  the  world' 
to  explain.  For  this  “something”  is  got  from  the  increasing 
value  of  the  total  services  of  the  goods  as  these  services  come 
nearer  to  the  present.  ISJ'ow,  naturally,  each  service  increases 
in  value  as  it  comes  nearer  the  time  of  its  realisation  in  the 
same  ratio  as  it  was  underestimated  formerly  by  reason  of  its 
remoteness : that  is  to  say,  it  increases  in  va1ue_by:  the  usual 
nja-rkel^  percentage  on  its  individual  value.  But  since,  as  we 
saw,  the  sum  of  the  individual  values  of  all  the  services  inherent 
in  a good  constitutes  the  value  of  that  good,  the  increment  of 
value  of  all  the  services  added  together  must  be  exactly  equal 
to  the  usual  market  percentage  on  the  total  value  of  the  good. 

To  put  all  this  into  figures.  At  the  beginning  of  the  first 
year  of  its  use  the  good,  as  bearer  of  six  annual  services,  was 
worth  in  present  value  100  + 95'23  + 90'70  + 86’38  + 82‘27 
-1-7 8 ‘3 5;  that  is,  532'9_^  At  the  end  of  the  first  year,  as 
now  capable  of  five  annual  services  of  the  present  value  of 
100  -H  95-23  + 90-70  + 86-38  -f  82-27,  it  is  worth  454-58. 
The  loss  in  value  is,  therefore,  78-35,  which  is  exactly  the 
same  as  the  former  most  remote  service  was.  But  since  the 
sum  received  from  the  current  years  service — the  value  of 
the  ser-vice  sold  and  now  deducted — amounted  to  100,  there 
remains  a net  gain  of  21-65,  which  is  exactly  5%  of  43 2' 93^ 
the  sum  which  the  good  became  worth  immediately  on  deduc- 
tion  of  the  first  service  realised,  as  one  might  say,  to  account.^ 

1 On  the  part  return  of  100,  wliich  was  separated  off  from  the  good  on  the 
first  day  of  the  year,  the  good  naturally  will  no  longer  yield  any  interest.  If,  on 
the  other  hand,  the  year’s  utility  is  only  obtainable  at  the  end  of  the  year,  it 
must  naturally  pay  interest  on  the  full  initial  value  of  the  bearer  of  the  utility, 
as  will  be  brought  out  somewhat  more  fully  later  on. 


CHAP.  VII  GROSS  RETURN  LESS  WEAR  AND  TEAR 


345 


Similarly,  in  the  second  year’s  use,  the  owner  again  realises 
the  service  now  become  present  and  worth  100,  This  comes 
off  the  value  of  the  parent  good.  But  the  succeeding  service, 
which  before  had  become  worth  9 5 '2  3,  now  arrives  at  the  fidl 
value  of  100:  that  succeeding  it,  becomes  worth  9 5 '2 3,  and  so 
on.  Only  the  last  service,  that  originally  worth  8 2 ’2 7,  finds 
nothing  to  replace  it.  At  the  end  of  the  second  year’s  use, 
then,  the  gooff  as  capable  of  four  remaining  annual  services  of 
the  individualvalues  of  100  + 95'23  + 90-70  + 86-38,  i.s  worth 
372-31.  As  against  the  value  of  454-58  which  it  had  at  the 
beginning  of  the  year,  it  has  suffered  a loss  of  value  of  82-27 
which  is  equal  to  the  value  of  what  was  the  last  service ; and 
as  against  the  receipt  of  100,  it  returns  17-53  net,  the  interest 
on  the  somewhat  reduced  capital  ^ that  remains.  And  thus  it 
goes  on  from  year  to  year,  the  gross  return  always  remaining 
the  same  (because  by  hypothesis  the  amounts  of  service  remain 
unchanged  in  technical  quality),  the  quota  for  wear  and  tear 
always  increasing  (because  the  marginal  service,  that  which 
determines  the  loss  of  value,  stands  nearer  to  the  present,  and 
so  to  the  full  present  value),  and  the  net  interest  always  de- 
p.rpa.m'ng  (in  correspondence  with  the  decrease  of  the  capital, 
owing  to  wear  and  tear,  on  which  interest  has  to  be  paid),  till 
finally  the  good  has  entirely  given  up  its  useful  content  and  is, 
as  we  say,  consumed. 

Put  in  general  terms,  then,  we  get  the  following  very 
simple  explanation  of  the  phenomenon  of  interest  on  durable 
goods.  The  owner  of  a durable  good  can  always  realise  ^ 
the  full  (higher)  value  of  the  then  present  utility,  and  this 
represents  the  “ gross  return  ” of  the  good,  its  “ gross  interest.” 
fie  loses,  on  the  other  hand,  on  account  of  the  steady 
advance  of  the  more  remote  services  towards  the  present,  onlY 
the  smaller  value  of  the  last  service  then  inherent  in  the 
good.  This  smaller  value  determines  the  amount  of  the 
“ wear  and  tear,”  afid  thus  there  is  always  a difference  between 
gross  interest  and  the  amount  of  wear  and  tear,  which  differ- 
ence forms  his  net  profit  or  net  interest.  Thg^cause,  then,  to^ 
t^jp.b  npt  interest  owes  its  existence,  is  nothinq_-eh;ft— tha.Ti  an 

^ Of  354-58,  because  again  the  100  taken  off  at  the  beginning  of  the  yeai— 
which  may  independently  obtain  interest — need  no  longer  obtain  interest  through 
the  good. 


346 


INTEREST  FROM  DURABLE  GOODS 


BOOK  VI 


increase  of  value  of  the  future  services — services  which  were 
previously  of  less  value,  but  during  the  period  of  the  good’s  use 
have  pressed  forward  into  or  towards  the  present.^ 

Thus  our  theory  traces  back  the  profit  which  durnble  goods 

yield  their  owner  to  the  selfsame  causes  as  explain  interest  on 
loans  and  undertakers’  profit  on  production.  I think  I am 
justified  in  claiming  this  as  the  peculiar  merit  of  the  theory, 
and,  at  the  same  time,  as  a strong  proof  of  its  correctness. 
For  it  was  just  this  interest  on  durable  goods  {Nutzungsguter) 
that  formed  the  stone  of  stumbliiig  to  all  earlier  interest 
theories,  and  stood,  as  it  were,  a standing  contradiction  of  them. 
Supposing  that  the  other  kinds  of  interest  could  be  explained 
by  the  productivity  of  capital,  obviously  this  was  no  explana.- 
tion  of  the  interest  yielded  by  a durable  consumption  good 
which  produced  nothing,  such  as  a dwelling-house,  household 
furniture,  a hired  piano,  the  books  of  a lending  library.  Or, 
if  undertakers’  profit  was  traced,  with  more  or  less  appearance 
of  justification,  to  an  exploitation  of  the  labourers,  the  ques- 
tion remained : What  labourers  are_exploited  by  the  ownen-oT 
a house  ? Suppose  he  has  paid  away  the  whole  £2000,  the 
worth  of  his  house,  in  wages  to  the  labourers  who  built  it,  so 
that  in  the  origin  of  the  house  there  is  not  a particle  of  profit 
from  exploitation : still,  the  house,  year  after  year,  yields  him 
£100  of  interest  on  capital.  Where  shall  we  find  the  worker 
from  whom  the  £100  could  have  been  taken  either  by  fraud 
or  force  ? 

The  “ Use  theory  ” appears,  at  first  sight  at  least,  better 


^ If  the  year’s  service  can  be  obtained  only  at  the  year’s  end,  ths  figiirm  of 
the  valuation,  and  with  them  the  figures  of  the  interest,  will  be  altered,  hut  the 
principle  of  the  process,  and,  in  particular,  the  reduction  of  value  by  the  amount 
of  the  then  last  service,  remains  unchanged.  I shall  put  together  in  the  follow- 
ing tables  the  course  of  the  value  movement  for  one  such  case.  The  initial  value 
of  a good  which  will  last  six  years,  and  has  an  annual  utility,  obtainable  at  the 
end  of  the  year,  of  100,  is,  as  stated  above  (p.  343  in  note),  equal  to  95‘23  -f 


90-70  -f  86-38  + 82-27  -H  78-35  4-  74-62 
Value  on  Value  on 

Tear.  1st  Jan.  31st  Deo. 

507-55. 

Gross 

Int. 

Wear  and 
Tear. 

Net  Int. 

1888 

507-55 

432-93 

100 

74-62 

25-38 

1889 

432-93 

354-58 

100 

78-35 

21-65 

1890 

354-58 

272-31 

100 

82-27 

17-73 

1891 

272-31 

185-93 

100 

86-38 

13-62 

1892 

185-93 

95-23 

100 

90-70 

9-30 

1893 

95-23 

— 

100 

95-23 

4-77 

CHAP.  VII  UNEXPLAINED  BY  OTHER  THEORIES 


347 


able  to  acoount  for  this  form  of  interest,  since  it  borrows  its 
special  foundation  directly  from  the  phenomenon  of  the  durable 
use  of  non-perishable  goods.^  Ent-neither  does  it  get  beyond 
the  mere  semblance  of  an  explanation.  It  gets  entangled  in 
subtleties  of  a “ wider  ” and  a “ narrower  ” use,  of  a “ gross  ” 
and  a “ net  ” utility, — terms,  by  the  way,  which  may  be  quite 
proper  as  convenient  expressions  to  indicate  certain  pheno- 
mena, but  represent  anything  but  clear  and  definite  conceptions 
— and  leaves  entirely  unexplained  the  nature  of  the  relations 
existing  between  the  value  of  the  net  and  the  value  of  the 
gross  use,  between  the  value  of  the  parent  good  and  the 
amount  of  its  wear  and  tear.  Whether  net  intp.rp..c!t  is  higb*-^ 
bp.cH,iisp.  the  value  of  the  capital  is  high,  or  whether  capital 
value  is  high  because  net  interest  is  high  ; whether  the  amount 
of  gross  interest  is  cause  or  effect  of  the  value  of  the  other 
tw'o  amounts — on  these  questions  we  should  seek  in  vain, 
in  the  writings  of  Hermann,  Knies,  or  Schaffle,  for  anything 
approaching  to  clearness  of  inquiry  and  for  anything  like 
a real  explanation.  To  all  thes'e  questions  our  theory  gives 
one  concise  answer.  The  value  of  material  services  (Gross 
Use)  forms  the  first  link  in  the  causal  chain.  The  value  of^ 
the  “ bearer  of  the  use,”  the  parent  good,  is  the  sum  of  the 
individual  values  of  its  material  services.  Wear  and  tear  is  a 
result  of  the  diminution  of  the  services  which  still  reside  in 
the  good,  and  is,  on  account  of  the  progression  in  time  of  the 
later  services,  neither  equal  to  the  value  of  the  material  service 
detached  during  the  year  of  use,  nor  yet  corresponding  to  the 
degree  of  physical  wear  and  tear^  (which,  if  the  good  last  six 


^ See  Capital  and  Interest,  p.  194,  and  particularly  p.  233. 

^ ^ very  Tif^tpwnrtliy  which  theory  Up  till  uow  has  left  entirely  without 
notice  and  entirely  without  explanation.  I have  already  called  attention 
to  it  in  my  book  Rechte  und  Verhdltnisse,  p.  68,  note  6.  As  to  the  actual 
Fact  that  the  successive  diminution  of  value,  which  a good  suffers  in  the  course  of 
its  wear  and  tear,  does  not  go  parallel  with  the  desfree  of  its  physical  wear  and 
tear.  ,but  is  slower  at  the  beginning  and  quicker  as  time  goes  on,  there  can  be  no 
doubt.  It  may  be  seen  in  its  purest  form,  because  there  it  is  not  confused  through 
subjective  inexactnesses  or  caprice,  in  the  rating  of  valuable  paper  which  brings  in 
a fixed  annual  amount  for  a limited  number  of  years.  A bond,  e.g.,  which  assures 
its  owner  the  right  of  drawing  ten  years’  coupons  of  £1000,  and  possesses  (on 
a calculation  of  5%  compound  interest)  an  initial  course  value  of  £7722  (Spitzer’s 
Tables,  p.  274),  does  not  lose  £772'2  for  each  of  the  ten  years  which  make  up 
^ts  lifetime,  although  in  each  of  these  years  it  loses  exactly  one-tenth  of  its 
content.  In  the  first  year  it  loses  £614,  in  the  second  £645,  in  the  third  £677, 


348 


INTEREST  FROM  DURABLE  GOODS 


BOOK  VI 


years,  would  amount  yearly  to  one-sixth  of  the  whole  useful 
content),  but  is  equal  only  to  the  value  of  that  service  which 
is  the  last,  the  most  remote,  at  the  time  of  calculation.  And 
it  is  this  same  progression  in  time  which  causes  the  increase 
in  value  of  the  later  services  and  from  which  comes  a net  gain, 
the  interest  on  capital. 

The  same  considerations  that  have  elucidated  the  cause  of 
interest  from  durable  goods  throw  a strong  light  on  another 
])henomenon,  equally  familiar  and  equally  misunderstood. — ^that 
of  Capitalisation.  It  is  a well-known  circumstance  that,  to 
such  goods  as  yield  us  a more  or  less  permanent  return,  we 
ascribe  a certain  “ capital  value  ” in  consideration  of  this 
return.  We  estimate  them  as  equal  to  a money  capital  which, 
at  the  ruling  rate  of  interest  in  the  particular  country,  would 
yield  a similar  amount  of  return  for  the  same  period.  Thus  a 
house  which  returns  £500  a year,  we  value  at  £10,000  if  the 
usual  rate  of  interest  is  5^,  or  at  £12,500  if  the  rate  is 
4^  ; or  we  value  a machine  wliich,  for  six  years,  throws  off 
annually  a gross  amount  of  £100  and  certain  net  decreasing 
amounts,  at  something  over  £500. 

Why  do  we  attach  just  this  value  to  them  ? The  com- 
mon explanation  is ; Because  these  goods  yield  a certain  net 
return  we  must  hold  them  equal  in  value  to  a sum  of  money 
which  yields  just  the  same  net  retxirn.  This,  however,  is 
incorrect,  or  rather  it  is  not  an  explanation  at  aU  but  a 
reasoning  in  a circle.  The  existence  of  a net  return  is  not  the 
primary  fact,  which  can  be  given  as  cause  of  the  parent  good 
having  a definite  value,  but,  conversely,  a definite  value  must 
already  be  put  on  the  good  if  this  net  return  as  such  is  to 
appear.  If,  in  our  example,  the  machine,  which  in  six  years 
returns  in  all  £600,  had  been  valued  at  £600,  its  whole 
return  evidently  would  have  been  absorbed  by  the  “ wear  and 

and  .so  on  successively  £710,  £747,  £783,  £823,  £864,  £907,  and,  finally,  in  the 
tenth  year,  £952,  the  sum  it  was  still  worth  at  the  beginning  of  this  latter  year. 
But  in  all  other  kinds  of  durable  goods  the  same  course  of  wear  and  tear  may  be 
observed  with  sufficient  accuracy,  although,  for  obvious  reasons,  we  seldom  make 
so  exact  and  mathematical  a calculation.  Later  on  I shall  have  another  occasion 
to  mention  cases  of  this  kind.  Now  in  all  the  literature  known  to  me  I have 
found  no  attempt  to  give  an  explanation  of  this  fact. — which  is  certainly  notable 
enough  to  deserve  explanation.  Indeed,  such  an  explanation  is  simpl}'  not  to  be 
got  from  the  machinery  of  previous  theories,  particularly  the  “Use  theory,”  while 
it  offers  itself  unsolicited  on  the  lines  of  my  theory. 


CHAP.  VII 


CAPITALISA  TION 


349 


tear,”  and  there  would  have  been  nothing  left  over  as  net 
return.  It  is  simply  because  it  was  valued  at  less,  at  some- 
thing only  a little  over  £500,  that  there  remains  a net  interest 
after  deducting  the  quota  for  wear  and  tear.  And  it  is  exactly 
the  same,  as  I shall  show  farther  on  in  another  connection,  as 
regards  the  return  and  capital  value  of  houses,  lands,  etc. 

The  only  correct  conception,  and  the  only  conception  which 
really  gives  an  explanation  of  the  phenomenon,  is  the  one  now 
stated.  The  true  primary  fact  is  the  lower  vabie  of  fntnfo 
goods  and  future  services : next  we  have  the  parent  good,  as 
capable  of  containing  future  services,  estimated  at  a less 
amount  than  the  total  value  which  the  services  successively 
given  off  will  represent  as  they  are  given  off : and  finally,  as 
consequence,  comes  the  fact  that  the  capitahsed  sum  is  le.ss 
than  the  sum  of  the  amounts  realised.- J3y-the_services.JiL  the 
course  of  time,  and  that  there  is  a net  surplus  from  the  current 
return.  That,  on  the  one  hand,  the  value  of  the  bearer  of 
the  use,  and,  on  the  other,  its  net  return,  are  represented 
by  such  figures  that  the  former  may  be  held  equivalent  to  a 
money  capital  yielding,  at  the  current  rate  of  interest,  exactly 
the  same  net  return,  is  a coincidence  which  I have  already 
explained.^  And,  in  virtue  of  this  coincidence,  it  is.  finally,  as 
intelligible  as  it  is  justifiable  thaT,  in  practical  economic  life 
which  finds  and  adopts,  as  facts  ready  to  its  hand,  the  things 
which  we  try  to  explain,  the  net  return  of  gnndg  .should  be 
taken  as  foundation  for  acts  of  valuation.  It  is  an  abbreviated 
method  which,  practically,  is  quite  appropriate,  although  it 
turns  the  relation  of  cause  and  effect  exactly  the  other  way.^ 

1 See  above,  p.  343. 

^ In  Menger^  most  valuable  contribution  Zur  Tlieorie  des  Kapitales  (Conrad’s 
Jahrbilcher,  vol.  xvii.  p.  47),  which  appeared  while  this  was  passing  through 
the  press,  the  author  likewise  has  urged  against  the  Use  theory  that,  in  its 
conceution  of  canitalisation.  it  has  not  solved  its  problems,  but  only  gone 

round  about  them. 


CHAPTEE  VIII 


INTEREST  FROM  DURABLE  GOODS {continued) 

To  proceed.  The  phenomenon  of  interest-,  jnst  explained  is 
characteristic  of  alL  dumMe-goads^ousiimptiQn,  arKL^raductioii 
<yoods  alike.  But,  in  the  case  of  production  goods,  there  comes 
in  one  circumstance  the  influence  of  which  has  to  be  investi- 
j/gated.  In  goods  which  are  to  serve  as  instruments  of  production, 
not  only  are  the  future  services  remote  from  the  present,  but 
both  the  present  and  the  future  services  are  remote  from  that 

economical  goal  which  is  first  to  Jbe  reached  througli  production. 
The  final  destination  from  which,  according  to  principles  with 
which  we  are  now  familiar,  they  derive  their  value,  is  the 
product  obtainable  from  them^  in  the  future.  But  from  the 
attainment  of  this  goal  the  current  service — even  that  service 
in  the  very  act  of  realisation — is  distant  by  the  whole  produc- 
tion period^  which  must  intervene  between  its  incorporation 
in  the  process  and  the  turning  out  of  the  finished  product.  If 
this  period,  for  instance,  amounts  to  two  years,  the  current 
service  is  two  years  away  from  attaining  its  goal,  and  at  the 
same  time  from  attaining  its  full  present  value  : the  next  year’s 
service  is  three  years  away,  the  next  again  four  years,  and  so 
on ; while,  in  the  case  of  durable  consumption  goods,  every 
service  attains  its  full  present  value  in  the  year,  or  in  the 
ig  •’-endp^p'^  Now  this  has  a twofold  result : first, 
the  services  of  productive  goods  undergo  a greater  reduction  as 
compared  with  their  full  final  value,  and,  second,  the  growth 
of  their  value  lasts  longer  on  that  account.  After  tliey  are 
produced  and  set  to  work,  they  bear  interest  during  the  whole 

^ After  deducting  the  share  of  the  co-operating  complementary  factors. 


CH.  VIII  WHEN  BOTH  DURABLE  AND  PRODUCTIVE  351 


period  of  the  production  process  on  which  they  enter ; only, 
in  practice,  this  interest  is  ascribed,  not  to  the  durable  good; 
that  forms  an  integral  part  of  the  “ outlay  ” — from  which, 
indeed,  it  is  now  separated — hut  to  the  “ business  ” or  “ circu- 
lating” capital  into  which  it  is  transferred  at  the  moment  of 
its  separation. 

To  illustrate  this.  A durable  consumption  good  which 
lasts  six  years,  and  yields  at  the  end  of  each  year  a use  ^ of 
100,  is  worth,  as  we  have  seen,  95’23  + 90'70  + 86‘38  + 82‘27 
+ 78’3 5 + 7 4‘6 2 --  507‘55.^  A durable  productive  good,  on 
the  other  hand,  which  lasts  six  years,  and  whose  year’s  use 
affords  a final  utihty  of  100  after  a further  production  periad 
of  two  years,  has  the  following  value.  Its  “current”  year’s 
use,  which  is  first  obtained  by  the  end  of  the  year,  and  then 
brings  in  the  amount  of  100  after  two  years  more  (that  is, 
after  three  years  in  all),  is  only  worth  in  present  valuation 
86’38.  Its  next  year’s  use,  which  wiU  bring  100  in  four 
years,  is  to-day  worth  82'27.  Similarly  the  third  year’s  use 
has  a present  value  of  78'35,  the  fourth  year’s,  a value  of  7 4’62, 
the  fifth,  a value  of  71 '06,  and,  finally,  the  sixth  has  a value 
of  67‘68.  The  whole  productive  good,  accordingly,  has  a value 
of  460-36. 

At  the  end  of  the  first  year’s  use  the  first  service  is 
detached ; this,  meanwhile,  has  come  nearer  to  its  final  goal 
by  a year,  and  accordingly  advances  in  value  from  8 6 '3 8 to 
90’70  ; the  other  services  foUow  suit  in  the  usual  way.  Thus 
the  good,  as  still  bearer  of  five  prospective  services  of  the 
individual  values  of  86-38 82-27 -|- 78'35 -|- 74-62-l-7l‘06, 
is  now  worth  in  all  392-68.  It  has  therefore  lost  67-68, 
in  the  cnnrsp.  nf  the  year’s  use,  and,  as  against  the  return  of 
90-70  represented  by  the  service  detached,  has  borne  23-02 
of  interest — exactly  5*^  on  the  initial  value  of  460-36.  So 


y 


^ Here  I must  assume  that  the  utility  is  pot  obtainsd  in  advance,  but  at 
the  expiry  of  the  particular  period,  because  in  the  case  of  durable  productive 
goods  employed  in  a personal  undertaking — with  which  the  comparison  is  to  be 
made — there  is,  in  the  nature  of  things,  no  anticipative  use.  The  utility,  e.g., 
which  an  agricultural  implement  affords  in  farming,  cannot  possibly  be  obtained 
on  1st  January,  for  the  whole  year  in  advance  : obviously  it  can  be  realised  only 
at  the  end  of  the  year,  in  the  harvest. 

“ P.  343,  note  1.  At  a different  interest  rate,  of  course,  the  figures  would  be 
different. 


352 


INTEREST  FROM  DURABLE  GOODS 


BOOK  VI 


far  everything  runs  as  before.  But  the  service  which  was 
separated  off,  with  the  value  of  90-70,  neither  remains  in  its 
former  shape  nor  retains  its  former  value.  It  is  detached 
from  the  fixed  capital,  and  has  passed  over  into  the  circnia.tjng 
capital,  where  it  remains  incorporated  in  some  or  other  of 
the  intermediate  products,  say,  in  the  yarn  spun  by  the 
machines.  In  this  new  shape  it  is  the  object  of  the  further 
production  process,  and  is  by  it  brought  step  by  step  nearer 
to  fuU  maturity,  and  so  to  its  future  value  of  100.  This 
it  attains  in  the  following — the  second — year  of  use. 

At  the  end  of  the  second  year’s  use  again,  the  service, 
which  is  now  the  current  one,  is  detached  from  the  parent 
good  with  a value  of  90-70  : the  parent  good,  now  valued  at 
321-62,  has  lost  71-06,  and,  as  against  the  return  of  90-70, 
haa  borne  19-64  as  interest.  But  during  this  same  year,  the 
service  detached  in  the  -previous  year  and  incorporated  in  the 
circulating  capital,  has  risen  from  90-70  to  9.6-23  in  value 
and  BaarB  guntlipr  of  intere.st.  And,  again,  in  the  same 

way  at  the  end  of  the  third  year  of  use,  a service  of  the  then 
value  of  90-70  is  detached,  by  which  the  parent  good  loses 
74-62  in  value,  and  interest  gains  16-08.  But  since 
simultaneously  the  service  detached  two  years  before,  and 
incorporated  in  the  circulating  capital,  increases  from  95-23 
to  its  full  value  of  100,  and  that  detached  one  year  before, 
from  90-70  to  95-23,  there  is  a further  gain  in  interest  of 
4-77  + 4-53;  that  is,  of  9-30. 

^ In  this  way  the  peculiar  combination  of  circumstances  in 
durable  productive  goods  edves  occasion  to  a twofold  interest 
relatiqp.  Tha^services  already  detached  bear  intere§tL-aitgi: 

integral  part,  of  the  circulating  capital ; 
that  is,  their  claim  or  title  to  interest  is  based  on  their  trans- 
formation into  finished  and  final  product.  The  services  still 
contained  in  the  good  bear  interest  after  the  manner, nf. 

durable  consumption  goods ; that  is,  their  claim  is  based 
simply  on  their  approximation  to  the  present.  But,  of  these 
two  elements  of  the  interest  return,  only  the  second  is  formally 
ascribed  to  the  parent  good  from  which  it  springs ; for  it  the 
calculation  is  concluded  at  the  moment  in  which  the  individual 
service  is  detached,  and  with  the  value  which  it  then  has. 
What  further  happens  with  it  is  ascribed  to  the  circulating 


CH.  VIII  THE  CASE  OF  VERY  DURABLE  GOODS 


353 


capital  into  which  it  passes  at  the  moment  of  its  separation.’ 
And  thus  we  come  to  the  final  result : All  interpst  home  by 
durable  uroductive  goods  is  borne  by  them  simply  in  theu' 
character  of  diirable  goods^  while  their  second  property,  that 
of  being  productive,  only  comes  into  play  in  the  iuterpst  borne' 
bv  the  sp.rvir.R.g  airp.arly  dp.tAohed  and  transferred  to  circulati 
ing  capital  In  this  lies  the  complete  explanation  of  a 
developed  interest  phenomenon,  which  I before  suggested  but 
had  to  delay  going  fully  into  until  now.^ 

There  is  still,  however,  another  highly  important  explana- 
tion we  may  gather  in  passing. 

In  .goods  capable  of  only  a moderate  number  of  services 
the  contraction  of  value,  even  in  the  case  of  the  last  ser\dces.^ 

is  but  small.  The  result  of  this  is,  on  the  one  hand,  that  the 
value  of  the  parent  good  is  only  a little  behind  the  gradually 
developing  value  of  its  collective  services — in  our  first  example 
the  value  of  the  machine  lasting  six  years  was  not  quite  600, 
but  still  it  was  over  500  ; and,  on  the  other  hand,  that  the 
amount  of  wear  and  tear,  even  in  the  first  year,^  is  relatively 
high,  and  almost  equal  to  the  entire  value  of  the  current 
service — in  our  illustration  the  value  of  the  current  service 
was  100,  the  value  of  the  last  service,  that  which  decides  the 
wear  and  tear,  about  78. 

In  goods,  again,  capable  of  a very  long  series  of  services, 

both  the  value  of  the  parent  good  and  the  amount  of  wear 
and  tear  fall  proportionately.  A good  capable  of~relldenng 
ser^dees  of  the  annual  value  of  100  for  100  years,  is  very  far 
from  being  valued  at  lOOx  100  = 10, 000.  At  most  (where 
the  usual  under-valuation  of  future  goods  is  at  the  rate  of 

^ This  is  most  clearly  shown  when  the  intermediate  product  made  by  the 
assistance  of  the  durable  good — e.g.  the  cotton  yarn  spun  by  a machine — is 
immediately  sold  to  another  undertaker  by  whom  the  process  is  completed,  and 
the  yarn  made  into  thread  or  cloth.  All  increment  of  value  which  the  intpj- 
mediate  product,  the  yarn,  thus  obtains,  is  now  naturally  put  tn  t.he-acconnt  of 
this  particular  intermediate  product- (or  the  money  capital  for  which  it  is  sold) 
and  not  to  that  of  the  parent  durable  good. 

^ See  above,  p.  305. 

® In  the  later  years  the  “wear  and  tear”  increases  progressively,  because  the 
last  service,  which  is  not  replaceable  by  any  one  coming  after  it,  gets  always 
nearer  to  the  present,  and  becomes,  therefore,  always  higher  in  value.  See  above, 
particularly  the  table  on,  p.  346,  note  1. 

2 A 


354 


INTEREST  FROM  DURABLE  GOODS 


BOOK  VI 


5%)  it  is  worth  2000  ; and  the  loss  of  value  in  the  course  of 
the  first  year’s  use — although  a service  worth  100  has  been 
consumed  and  detached  from  the  use-content  of  the  good — 
is.  not  100  but  '76,  that  and  no  more  being  the  present  value 
(at  a discount  rate  of  5%  per  annum)  of  a sum  of  100  falling- 
due  in  1 0 0 years  ! ^ 

ly  Finally,  if  a good  is  capable  of  rendering  not  only  a greHf 
many,  but,  practically,  an  infinite  number  of  services,  the 
phenomenon  just  mentioned  is  seen  in  full  development : the 
present  value  of  the  parent  good  is  infinitely  less  than  the 
successively  increasing  value  of  its  services.  A piece  of  land, 
for  instance,  which  bears  £100  each  year  for  an  infinite  series 
of  years,  is  worth,  not  100  times  infinity,  not  £100,000,  not 
even  £10,000,  but  only  some  £2000,  and  its  loss  of  value 
sinks  to  zero : the  niece,  of  land-  whosp.  annual  current  ser-vice 
is  worth  £100.  yields  the  whole  £100  net.  The  law  remains 
just  as  before ; but  the  very  remote  services  of  the  second, 
third,  tenth  century,  have  so  exceedingly  small  a value  in  the 
present  that  they  can  add  almost  nothing  to  the  present  value 
of  the  land,  and  the  last  service,  the  one  which  should  decide 
the  amount  of  depreciation,  as  infinitely  far  away,  has  no 
present  value  at  all. 

l/"  This  is  the  ultimate  reason  why  rent  oL  land  appears  as 
a net  income,  and  here  first  is  the,  solution  of  the  problem 
of  rent  traced  to  its  real  issue.  The  old  rent  theory  gave 
only  a preliminary  and  partial  answer,  and,  strangely  enough, 
had  not  the  slightest  suspicion  that  its  tentative  solutions 
had  never  come  near  the  heart  of  the  problem.  All  preced- 
ing attempts,  from  Eicardo  downwards,  exhausted  themselves 
in  more  or  less  successfully  pointing  out  that  the  annual 
uses  of  land  have  an  economic  value,  or  yield  an  economic 
return,  and  why  they  do  so.  But  the  yield  of  suck  services 
is  in  itself,  first  of  all,  a gross  return.  That  the  owner  gets, 
a net  return,  a net  income,  has  nothing  to  do.'with-fruitful- 
ness,  situation,  kind  of  ground,  or  anv  such  thing,  but  simply 
with  the  lower  value  put  upon  future  goods,  and  the  deter- 
mination of  the  present  value  of  the  land  in  conformity  with 
that.  Suppose  that  a quarry,  after  deduction  of  all  other 
recognised  costs,  produced  for  a hundred  years  a — what  we 
1 Spitzer’s  Tables,  p.  121. 


CH.  viii  LAND  RENT  A SPECIAL  CASE  OF  THIS 


355 


may  call — net  annual  return  of  £100;  and  suppose  that 
future  services  were  not  less  valued  than  present ; the  value^ 
of  the  quarry  would  be  the  full  amount,  100  x 100.  The 
quarry -owner  would  draw  an  annual  income  of  £100,  but 
not  a shilling  of  that  would  he  “ rent  ” in  the  present  sense 
of  that  term,  that  is  to  say,  a net  income.  The  whole  of 
it  would  be  a protracted  consumption  of  the  parent  wealth  of 
£10,000.  And  the  case  of  all  other  lands  is  different  from 
that  of  the  quarry,  not  in  kind,  but  only  in  degree.  If  a field 
is  considered  capable  of  producing  crop  for  1000  years — or 
2000  years  if  one  should  prefer  it,  for  literal  infinity  in 
human  affairs  is  out  of  court — and  if  the  future  crops  are  to 
be  valued  as  highly  as  the  present  ones,  the  valuation  put 
upon  such  a field  wiU  reach  an  exorbitant  height,  viz. 
£100,000  or  £200,000,  and  the  yearly  rent  of  £100  will  pre- 
sent the  character  of  a breaking-off  of  the  parent  stem  of  wealth 
— a very  gradual  destruction  of  the  stem,  but  still  a destruc- 
tion, not  a net  income.  Landowners  would  be  lords  of  a 
giant  stem  or  stock  of  wealth,  but  they  would  have  no  net 
income. 

The  theoretical  explanation  of  rent  from  land,  then,  coin- 
cides ultimately  with  the  explanation  of  interest  obtained 
from  durable  concrete  capital,  and  land  rent  is  nntbiTig  a, 
special  c.ase  of  interest  obtained  from  durable  goods.  _ That  the 
two  explanations  do  not  entirely  coincide,  and  that,  on  the 
contrary,  the  current  rent  theories  are  substantially  so  very 
different  from  the  interest  theories,  is  only  traceable  to  the 
fact  that,  in  the  course  of  the  explanation  of  rent,  an  inter^ 
calation  had  to  be  made  which  did  not  require  to  be  Tnade  in 
the  case-of  interest  on  durable  capital : and  that,  at  the  same 
time,  from  a faulty  conception  of  the  rent  problem,  economists 
exhausted  the  whole  content  of  the  rent  theories  in  making 
this  special  intercalation.  In  the  case  of  all  products  of 
hliQiui  and,  consequently,  in  all  goods  that  constitute 
capital,  it  needs  no  explanation  that  they  and  their  material 
services  have  economic,  value : were  it  not  so  they  would  not 

be  produced.  In  the  case  of  the  services  nf  land  on  tliP 
other  hand,  this  is  not  self-evident.  And,  therefore,  the 
economist  must  first  exert  himself  to  show  why  and  under 
what  circumstances  the  use  of  land  receives  a value  and  a 


356 


INTEREST  FROM  DURABLE  GOODS 


BOOK  VI 


price.  With  a correct  value  theory,  a few  strokes  of  a pen 
will  supply  this  proof ; — by  means  of  the  doctrines  of  marginal 
utility  and  of  complementary  goods.  Wanting  the  guidance 
of  such  a theory,  and  entangled  in  the  fetters  of  the  labour 
value  theory,  economis.ts  gave  it  a shape  which  was  un- 
necessarily circumstantial  and  clumsy,  and  was,  at  the  same 
time,  not  very  satisfactory  in  principle.  Of  Ricardo’s  rent 
theory,  which  in  essence  has  remained  the  ruling  one  up  till 
the  present  day — the  theories  of  his  opponents  Carey  and 
Eodbertus  being  quite  exploded — it  must  be  said  that  it 
contains  an  abundance  of  truth  put  in  a formula  essentially. 
It  is  a brilliant  piece  of  casuistry,  which  is  out  of 
connection  with  the  central  fire  of  correct  principles ; it 
lights  up  a bit  of  the  road,  but  leaves  the  rest  in  obscurity 
and  error.  Hence  the  peculiar  fate  of  the  Eicardian  theory. 
It  does  not  quite  satisfy  anybod /.  Even  its  friends  are  fain  to 
discover  a number  of  weak  points  in  it,  and  its  most  universal 
propositions  are,  for  the  most  part,  its  weakest.  But  there 
remains  in  it  an  indestructible  core  of  truth,  which  lives  on 
under  the  most  varied  metamorphoses,  and,  even  to-day,  con- 
stitutes the  better  part  of  its  substance.^ 

But  how  far  does  the  Eicardian,  or  any  other  rent  theory, 
take  us,  even  if  it  were  correct  in  every  point  where  it  is 
disputable  ? It  takes  us  no  further  than  we  get  in  the  question 
of  interest,  when  it  has  been  shown  that  a threshing-machine, 
after  deducting  all  other  costs,  yields  an  annual  gross  interest. 

and  why  it  does  so^  Where  Eicardo  ends  his  rent  theory, 
there  in  truth  ends  the  intercalation,  which,  because  of  its 
obviousness,  did  not  require  to  be  made  in  the  case  of  mov- 
able capital.  But  it  is  just  then  that  the  chief  question  of 
the  problem  suggests  itself : why  there  is  a net  interest 
within  that,  gross  interest  which  is  yielded  by  the  year’s 
nse  or  service  of  the  threshing-machine  or  the  field,  after 
deduction  of  all  other  costs.  And  to  this  question — which 
the  rent  theory  up  till  now  has  entirely  omitted  to  put — 
no  answer  can  be  given,  either  as  regards  the  field  or  the 

^ On  the  relation  of  Ricardo’s  rent  theory  to  the  modern  value  theory,  see 

Dr ,T'.moc;  Ponar’s  aiiggestive  remaife  in  an  article  entitled  “The  Austrian 

economists  and  their  view  of  value”  in  the  Quarterly  Journal  qf  Economics, 
October  1888. 


CH.  viii  FAILURE  OF  RICARDO’S  RENT  THEORY 


357 


machine,  but  to  point  to  the  under -valuation  of  future  goods 
and  future  ser'sdcesd 

^ Manifestly  the  fact  that  Rent  of  Land  and  Rent  of  Capital  have  one  common 
final  cause  is  not  a sufficient  reason  for  abolishing  every  distinction  between 
them.  Between  land  and  capital  there  are  so  many  important  diflTerences, 
both  theoretical  and  practical,  that,  notwithstanding  the  common  feature  just 
described,  we  are  justified  in  adhering  to  the  decision  mafip.  in  a fnrmer  chapter 
to  keep  land  out  of  the  conception  of  capital. — Quite  lately  Carl  Menger,  in 
Conrad’s  Jahrhiicher,  vol.  xvii.  p.  48,  has  ably  put  forward  the  necessity  of  a 
comprehensive  “universal  theory  of  the  return  to  wealth.”  1 trust  that,  in 
the  contents  of  the  present  chapter,  he  will  see  an  earnest  attempt  to  develop 
such  a theory. 


CHAPTEE  IX 


RESULTS 

^We  have  traced  all  kinds  and  mp.f-.hnrla  nf  angninripf  interest 
tn  one  identical  source — the  increasing  value  of  future  goods 
as  they  ripen  into  present  goods.  Thus  it  is  with  the  profit 
of  the  undertakers,  who  transform  labour — the  future  good 
which  they  purchase — into  products  for  consumption.  Thus 
it  is  with  landlords,  property-owners,  and  owners  of  durable 
goods  generally,  who  allow  the  later  services  of  the  goods  they 
possess  to  gradually  mature,  and  pluck  them  when  they  have 
ripened  into  full  value.  Thus.  finaUv.  it  is  with  the  loan. 
Even  here  it  is  not  tke  case,  as  one  might  easily  think 
at  first  sight,  that  the  enrichment  of  the  capitalist  comes 
from  the  creditor  receiving  more  articles  than  he  gives — 
for  at  first,  indeed,  the  articles  concerned  are  less  in  value — 
but  from  the  fact  that  the  loaned  objects,  at  first  lower  in 
value,  graduaUv  increase  in  value,  and  on  the  moment  of 
fruition  enter  into  their  complete  higher  present  value. 

/'  What,  then,  are  the  capitalists  as  regards  the  community  ? 

V — In  a word,  they  are  merchants  who  have  present  goods  , tg 
sell  They  are  the  fortunate  possessors  of  a stock  of  goods 
which  they  do  not  require  for  the  personal  needs  of  the 
moment.  They  exchange  this  stock,  therefore,  into  future  goods 
of  some  form  or  another,  and  allow  these  to  ripen  in  their 
hands  again  into  present  goods  possessing  full  value.  Many 
capitalists  make  this  exchange  once  for  all.  One  who  builds 
a house  with  his  capital,  or  buys  a piece  of  land,  or  acquires 
a bond,  or  gives  a loan  at  interest  for  fifty  years,  exchanges 
his  present  goods,  wholly  or  in  part,  for  goods  or  services 
which  belong  to  a remote  period  of  time,  and  consequently 


CH.  IX  CAPITALISTS  MERCHANTS  IN  PRESENT  GOODS  359 


creates,  as  it  were  at  a blow,  the  opportunity  or  condition  of 
a permanent  increment  of  value,  and  an  income  called  interest 
which  wiU  last  over  this  long  period.  One,  again,  who  diST 
counts  a three  months’  bill,  or  enters  on  a one  year’s  productioin 
nmst  frequeTitlv  repeat  the  exchanged  In  three  months  or  in 
one  year  the  future  goods  thus  acquired  become  full-valued 
present  goods.  With  these  present  goods  the  business  begins 
over  again ; new  bills  are  bought,  new  raw  material,  new 
labour ; these  in  their  turn  ripen  into  present  goods,  and  so 
on  again  and  again. 

0 O 

Tn  thpi  rirp.mnstances,  then,  it  is  very  easily  explained  wliv 
capital  bears  an  “ everlasting  ” intprp.|C!t  We  may  dismiss  any 
idea  of  an  inexhaustible  “ productive  power  ” in  capital,  assur- 
ing it  eternal  fruitfulness, — any  idea  of  an  eternal  “Use” 
given  off,  year  out  year  in,  to  the  end  of  time  by  a good  perhaps 
long  perished.^  It  is  because  the  stock  of  present  goods 
is  always  too  lo;g  that  the  conjuncture  for  their  exchange 
against  future  goods  is  always  favourable.  And  it  is  because 
time  always  stretches  forward  that  the  prudently  purchased 
future  commodity  steadily  becomes  a present  commodity,  grows 
accordingly  into  the  full  value  of  the  present,  and  permits  its 
owner  again  and  again  to  utihse  the  always  favourable  con- 
juncture. 

1 do  not  see  that  there  is  anything  objectionable  in  tbi.g. 

For  natural  reasons,  present  goods  are  certainly  more  valuable 

1 The  incQi  rsftnpss  of  a tliporv  is  shown  in  its  not  being  able  to  give  a satis.- 

factory  solution  for  all  given  cases.  I have  already  had  frequent  occasion  to 

point  to  cases  which  could  not  be  satisfactorily  explained  by  means  of  the — to 
my  mind — incorrect  “Use  theory”  (see  above,  pp.  297,  347).  Here  I have  to 
add  another  instance  ; — the  buying  of  a perpetual  interest,  e.a.  Consols,  where  the 
original  debt  can  neither  be  called  up  nor  paid  back.  In  these  annual  payments 
the  Use  theory  would  see  the  price  for  a “ use  of  capital  ” perpetually  transferred. 
But  what  has  happened  with  the  capital  stock  1 It  has  of  course  been  transferred. 
But  it  is  not  simply  lent,  for  it  will  never  be  paid  back.  Nor,  in  the  view  oi  the 
Use  theorists,  can  it  be  transferred  against  payment,  for  the  annual  interest  is 
the  price  of  the  “ use,”  and  there  is  nothing  paid  beyond  that.  Nor,  finally, 
is  it  transferred  without  payment, — presented  as  a gift : the  rentiers,  the  repre- 
sentatives of  those  who  made  the  loan,  have  no  intention  of  making  any  such 
present,  and  tlie  government  which  received  the  loan  certainly  does  not  feci 
that  it  has  received  a gift. — Now  what  the  Use  theory  could  not  explain,  or 
explained  only  in  a most  artificial  way,  is  explained  perfectly  simply  by  our 
theory  : it  is  just  an  exchange  of  present  goods  (the  original  ca]ntal')  against 
series  of  future  .sums  of  goods  (the  annual  interest  jiayments).. 


360 


RESULTS 


BOOK  VI 


j commodities  than  future  goods.  IjL  the  owner  of  the  more 
' valuable  commodity  exchange  it  for  a greater  quantity  of  tho. 
less,  valuable,  there  is  nothing  more  objectionable  in  this  than 
that  the  owner  of  wheat  should  exchange  a peck  of  wheat  for 
more  than  a peck  of  oats  or  barley,  or  that  a holder  of  gold 
should  exchange  a pound  of  gold  for  more  than  a pound  of  iron 
or  copper.  For  the  owner  not  to  realise  the  higher  value  of  his 
commodity  would  be  an  act  of  unselfishness  and  charity  which 
could  not  possibly  be  translated  into  a general  duty,  and  as 
a fact  would  not  be  so  translated  in  regard  to  any  other 
commodity. 

In  the  essence  of  interest,  then  .-Acre  is  -nothing— wbicfi 
should  make  it  appear  in  itself  unreasonable  or  unjust.  But 
the  essence  of  an  institution  is  one  thing,  and  the  circum- 
stances which  may  accidentally  accompany  it  in  its  practical 
working  out  are  another.  That  the  community  has  a power  of 
choosing  representatives  is  good ; but  if  at  every  election  there 
are  broken  heads,  and  pot-house  agitation  and  brute  force 
instead  of  patriotic  deliberation  decide  the  majority,  it  is  not 
good.  And,  like  every  other  human  institution,  interest  is 
exposed  to  the  danger  of  exaggeration,  degeneration,  abusf? ; 
and,  perhaps,  to  a greater  extent  than  most  institutions. 

/ It  is  undeniable  that,  in  this  exchange  of  present  com- 
modities against  future,  the  circumstances  are  of  such  a nature 
as  to  threaten  the  poor  with  exploitation  of  monopolists. 
Present  goods  are  absolutely  needed  by  everybody  if  people 
are  to  live.  He  who  has  not  got  them  must  try  to  obtain 
them  at  any  price.  To  produce  them  on  his  own  account 
is  proscribed  the  poor  man  by  circumstances ; the  only  kind 
of  production  he  could  take  up  would  be  one  yielding  an 
immediate  return,  and  this  is  not  only  uuremunerative  but 
almost  impracticable  under  modern  economic  conditions.  He 
must,  then,  buy  his  present  goods  from  those  who  have  them, 
either  in  the  form  of  a loan,  or,  more  usually,  by  selling  his 
labour.  But  in  this  ba.rgain  he  is  doubly  handic,a,pped ; first, 
by  the  position  of  compulsion  under  which  he  finds  himself, 
and,  second,  by  the  numerical  relation  existing  between  buyers 
and  sellers  of  present  goods.  The  capitalists  who  have  pre- 
sent goods  for  sale  are  relatively  few ; the  proletarians  who 
must  buy  them  are  innumerable.  In  the  market  for  present 


CH.  IX  ESSENCE  OF  INTEREST  NOT  EXPLOITATION  361 


goods,  then,  a majority  of  buyers,  who  find  themselves  com- 
pelled to  buy,  stands  opposite  a minority  of  sellers,  and  this 
is  a relation  which  obviously  is  profoundly  favourable  to  the 
sellers  and  unfavourable  to  the  buyers. 

Kow.  of  course,  the  circumstances  unfavourable  to  buyers 

may  be  corrected  by  active  competition  among  sellers.  The 
fewer  the  sellers,  the  greater  are  the  amounts  of  present  goods 
they  have  to  dispose  of  To  find  purchasers  for  them  all, 
competition  must  bring  down  the  price  from  extreme  heights 
to  a moderate  level  that  leaves  no  room  for  exploitation  of 
poor  men.^  Fortunately,  in  actual  life  this  is  the  rule,  not 
the  exception.  But,  every  now  and  then,  something  will 
suspend  the  capitalists’  competition,  and  then  those  unfor- 
tunates, whom  fate  has  thrown  on  a local  market  ruled 
by  monopoly,  are  deli^"ered  over  to  the  discretion  of  the 
adversary.  Hence  direct  usury,  of  which  the  poor  borrower 
is  only  too  often  the  victim : and  hence  the  low  wages  forcibly 
exploited  from  the  workers — sometimes  the  workers  of  indi- 
vidual factories,  sometimes  of  individual  branches  of  pro- 
duction, sometimes — though  happily  not  often,  and  only  under 
peculiarly  unfavourable  circumstances — of  whole  nations. 

It  is  not  my  business  to  put  excesses  like  these,  where 
there  actually  is  exploitation,  under  the  aegis  of  that  favour- 
able opinion  I pronounced  above  as  to  the  essence  of  interest. 
But,  on  the  other  hand,  I must  say  with  all  emphasis,  that  what 
we  might  stigmatise  as  “ usury  ” does  not  consist  in  the  obtain- 
ing of  a gain  out  of  the  loan,  or  out  of  the  buying  of  labour.*^ 
but  in  the  immoderate  extent  of  that  gain.  If  exchanges  are 
to  take  place  between  present  and  future  commodities,  the 
existence  of  some  gain  is  an  entirely  normal  phenomenon ; is, 
indeed,  an  economic  necessity.  Some  gain  or  profit  on  capital 
there  would  be  if  there  were  no  compulsion  on  the  poor,  and 
no  monopolising  of  property ; and  some  gain  there  must  be. 

It  is  only  the  height  of  this  gain  where,  in  particular  cases, 
it  reaches  an  excess,  that  is  open  to  criticism,  and,  of  course, 
the  very  unequal  conditions  of  wealth  in  our  modern  com- 
munities bring  us  unpleasantly  near  the  danger  of  exploitation 
and  of  usurious  rates  of  interest. 

As  little,  again,  will  the  unbiassed  spectator  deny  that,  in 
* See  below  on  the  Rate  of  Interest. 


36-2 


RESULTS 


BOOK  VI 


the  circumstauces  accompanying  tlie  receipt  of  interest,  it  is 
freqnently  the  case  that  one’s  sense  of  fairness  is  offended  by 
the  contrast  between  gnin  ami  flp.sp.rl-.^  Where  capital  has 
once  been  obtained  by  personal  exertion  and  ability  no  one 
would  grudge  its  owner  the  further  profit  he  makes,  without 
exertion,  by  exchanging  his  hard-won  present  goods  into  future 
goods.  But  often  it  is_iiist  the  greatest  fortune  that., falls  iatp 
the  lap  of  its  owner  without  any  personal  desert  on  his  part, 
simply  by  the  happy  chance  of  a legal  enactment  giving  him 
the  preference,  and  in  this  case  also  the  lucrative  exchange,  of 
present  goods  for  future  goods  which  steadily  ripen  into  more 
valuable  present  goods,  is  made  without  exertion  and  without 
personal  deserving.  In  all  other  branches  of  exchange  clever 
speculation  is  needed,  timely  seizing  of  opportunities,  favourable 
conjunctures,  if  a gain  is  to  be  made  by  the  exchange.  But 
the  merchant  of  present  goods  finds  _thft  conjuncture  always 
favourable.  He  need  only  put  out  his  hand  to  dispose  of  his 
goods,  with  a profit,  to  any  one  among  the  thousands  of  eager 
buyers,  while,  by  his  side,  the  poor  labourer  drags  out  a painful 
existence  of  heavy  toil,  at  a sacrifice  of  personal  strength  and 
personal  happiness. 

But  what  is  the  conclusion  from  all  this  ? Surely  that, 
owing  to  accessory  circumstances,  interest  may^  be  associated 
with  a usurious  exploitation  and  with  bad  ocial  conditions ; 
not  that,  in  its  innermost  essence,  it  is  rotten.  And  the 
logical  conclusion  is  that  the  axe  should  be  laid  to  the  decayed 
branches,  and  not  to  the  sound  stem. — just  as  it  would  be 
foohsh  to  take  away  the  right  of  self-representation  instead  of 
simply  putting  down  the  riots  at  election  time.  But  what  if 
these  abuses  are  so  inseparably  connected  with  interest  that 
they  cannot  be  eradicated,  or  cannot  be  quite  eradicated  ? 
Even  then  it  is  by  no  means  certain  that  the  institution 
^lould  be  abolished.  Arrangements  absolutely  free  from 
drawback  are  never  allotted  to  us  in  human  affairs.  Instead 
of  the  absolute  good,  which  is  beyond  reach,  we  must  choos.e 
what,  on  the  whole,  is  the  relativ^bfisE  where  the  balance, 
between  attainable  advantage  and  the  drawbacks  that  must 
be  taken  into  the  bargain,  is  the  most  favourable  possible  for 
us.  Living  in  a great  city  has  certainly  many  disadvantages ; 
so  has  living  in  a small  city ; and  so  has  living  in  the  country. 


CHAP.  IX  BALANCE  IN  FA  FOUR  OF  INTEREST 


36.3 


But  we  must  live  somewhere^  and  so  we  make  our  choice  of 
the  place  where,  after  wise  consideration  of  all  the  circum- 
stances, the  unavoidable  evils  seem  to  be  most  outweighed  by 
the  advantages.  And  in  the  same  way,  before  we  abolish 
interest  as  such,  we  must  first  draw  out  a balance-sheet  to 
show  whether  human  wellbeing  is  better  promoted  in  a society 
which  permits  gain  from  capital  and  recognises  it,  or  in  one 
which  permits  only  income  from  labour. 

In  making  this  calculation  it  wiU  n6t  be  overlooked  that 
the  institution  of  interest  has  its  manifold  uses : particularly 
as  the  prospect  of  interest  induces  saving  and  accumulation  of 
capital,  and  thus,  by  making  possible  the  adoption  of  more 
fruitful  methods  of  production,  becomes  the  cause  of  a more 
abundant  provision  for  the  whole  people.  In  this  connection 
the  much-used  and  much-abused  expression,  “ Eeward  of 
Abstinence,”  is  in  its  proper  place.  The  existence  of  interest 
cannot  be  theoretically  explained  by  it : one  cannot  hope  in 
using  it  to  say  anything  about  the  essential  nature  of  interest : 
every  one  knows  how  much  interest  is  simply  pocketed  without 
any  “abstinence”  that  deserves  reward.^  But,  just  as  interest 
sometimes  has  its  injurious  accompaniments,  so  in  its  train  it 
brings  others,  fortunately,  that  are  beneficent  and  useful ; and 
to  these  it  is  due  that  interest,  which  has  its  origin  in  quite 
different  causes,  acts,  a.mong  other  things,  as  a wage  and  as  an. 
inducement  to  save.  I know  very  well  that  private  saving 
is  not  the  only  possible  way  to  the  accumulation  of  capital,  and 
that,  even  in  the  Socialist  state,  capital  may  be  accumulated 
and  added  to.'"^  But  the  fact  remains  that  private  accumula- 
tion of  capital  is  a proved  fact,  while  socialist  accumulation 
is  not ; — and  there  are,  besides,  some  very  serious  a priori 
doubts  whether  it  can  be. 

Still  it  is  neither  my  purpose  nor  my  duty  to  inquire 
what  organisation  of  society  on  the  whole  is  best, — the  present 

^ I gladly  embrace  this  opportunity  to  repair  an  omission  in  my  Capital  and 
Interest.  At  the  time  when  I published  that  work  I unfortunately  had  not 
made  the  acquaintance  of  Loria’s  La  Rendita  Fondiari-a  (Mailand,  1880).  It  con- 
tains (pp.  610-624)  an  unusually  spirited  and  subtle  variation  of  the  Abstinence 
theory,  of  which  I can  only  say  that,  if  the  Abstinence  theory  were  tenable — 
which,  of  course,  I do  not  believe  it  to  be — Tioria’s  setting  of  it  would  be  the 
first  to  gain  recognition. 

^ See  above,  p.  114. 


364 


RESULTS 


BOOK  VI 


or  the  Socialist.  I have  only  here  to  answer  what  comes  up 
for  answer  in  an  inquiry  as  to  the  nature  and  origin  of  interest. 
And  the  answer  here  runs : There  is  no  inherent  blot  in  the 
essential  nature  of  interest  Those,  then,  who  demand  its 
abolition  may  base  their  demand  on  certain  considerations  of 
expediency,  but  not,  as  the  Socialists  do  at  present,  on  the 
assertion  that  this  kind  of  income  is  essentially  unjustifiable. 

Js  the  abolition  of  interest,  then,  possible.?  It  may,  I 
think,  not  be  unprofitable  to  many  of  my  readers  to  follow 
the  fate  of  interest  in  the  Socialist  state. 


CHAPTEE  X 


INTEREST  UNDER  SOCIALISM 


Let  us  i'map;me  the  Socialist  stat.p.  pe.rfftptly  rftaE'sp.d  ; all 
private  property  in  land  and  capital  aboEslied  ; all  instruments 
of  production  vested  in  the  hands  of  the  community ; all 
citizens  working  as  labourers  in  the  service  of  the  common- 
weal ; and  the  national  product  distributed  to  all  according  to 
work  done.  How  is  it  now  with  the  action  of  those  causes 
which  produced  interest  imder  the  individualist  eccmomy  ? 

First  of  all,  it  must  be  made  clear  that  the  causes  are  still 
there.  There  is  always  a natural  f difference  of  value  between 
present  and  future  goods ; and  since  under  Socialism  time  does 
not  stand  still,  future  goods  gradually  become  present  ones, 
and  bring  a surplus  value  with  them.  The  difference  of  value 
between  present  goods  and  future,  I sav.  is  always  there.  For 
its  peculiar  causes  continue  to  exist ; — the  difference  between'V 
the  circumstances  of  provision  in  present  and  future,  the  | 
partial  underestimate  of  the  future  which  is  characteristic  of  man,  | 
the  uncertainty  and  shortness  of  life.  In  the  Socialist  state  no 
one  will  he  allowed  to  be  an  undertaker  on  his  own  account, 
and,  of  course,  the  consideration  of  the  greater  technical  pro- 
ductiveness of  present  goods  employed  as  productive  instruments 
ceases  to  be  a motive  for  individuals : all  the  more  strongly 
does  this  motive  obtain  as  regards  the  great  economic  common-  ^ 
wealth  which  now  conducts  and  guides  the  total  national  pro- 
duction. 

Thus,  even  for  the  Socialist  state,  it  is  absolutely-  iu- 
conceivable  that  economic  subjects,  whether  as  individuals 
or  as  the  powerful  economic  commonweal,  should,  in  their 
economic  judgment  and  their  economic  practice,  treat  present. 


366 


INTEREST  UNDER  SOCIALISM 


BOOK  VI 


and  future  goods  as  on  the  same  footing.  How,  for  instance, 
could  it  be  all  the  same  to  the  Socialist  worker  whether, 
he  received  his  hard-earned  wage  by  instalments  of  £1  a 
week,  or  in  £52  at  the  end  of  a year,  or  in  the  shape,  perhaps, 
of  £5  2 five  or  ten  or  fifty  years  later  ? Or  how  is  it  con- 
ceivable that,  under  Socialism,  a young  oak  sapling  which  will 
be  an  oak  tree,  with  the  value  of  an  oak  tree,  in  two  hundred 
years,  can  be  made  equal  in  value  to  an  oak  full-grown  now  ? 
The  central  authority  directing  the  national  production  must 
jhgsp.  its  entire  arrangements  and  dispositions  on  a calculation 
/of  present  a.uH  future  goods  having  different  values,  if  its 
I dispositions  are  not  to  be  quite  inept  and  monstrous.  If 
• it  do  not  put  a less  value  on  future  goods  it  must  find  that 
a process  which  promises  a greater  number  of  products  in  the 
far  future  is  more  remunerative  than  a process  which  yields  a 
small  number  in  the  present  or  near  future,  and  it  must, 
accordingly,  always  turn  its  productive  powers  to  remote 
productive  ends,  however  remote  they  are,  as  being,  technically, 
the  most  fruitful.  The  natural  con.sequence  would  be  very_ 
much  as  we  have  alreadv  pictured  it  ^ — misery  and  want  in 
j/  tlie__^resfiat : and  those  in*  charge  of  the  national  economy 
would  have  no  more  pressing  duty  than  to  overturn  this  inept 
disposition,  give  the  less  amount  of  present  goods  the  preference 
over  the  greater  amount  of  future  ones,  and  so  prove  that  the 

i difference  in  value  between  present  goods  and  future  is  an 
elementary  economic  phenomenon  independent  of  any  human 
arrangements. 

If  it  is  now  clear  that,  even  in  the  Socialist  state,  present 
goods  win,  universally,  be  valued  more  highly,  it  goes  without 
saying  that,  if  there  is  an  exchange  between  the  two,  it  cannot 
be  effected  at  par.  Exactly  as  under  the  present  economic 
organisation,  present  goods,  as  more  valuable,  will  claim  and 
will  receive  an  agio.  PTnprgQnce  oLthis  agio — and  with 

it  the  emergence  of  interest  in  its  most  legitimate  form — 
could  only  be  repressed  if  every  opportunity  for'  it  were 

\ repressed  : in  other  words,  if  the  exchange  or  barter  of  present 
1 goods  for  future  were  removed  out  of  the  world  altogether. 

How,  of  course,  this  would  be  attempted  to  a considerable 
extent  in  the  Socialist  state.  All  private  ownership  in  the 
1 See  above,  p.  335. 


CHAP.  X 


COULD  NOT  BE  ABOLISHED 


367 


means  of  production  being  banished,  all  production  on  private 
account  would  be  banished  also,  and  all  opportunity  of  buying 
the  future  commodities,  Lalx)ur,  Uses  of  Land,  and  Capital, 
would  be  taken  away  from  private  individuals.  Since,  then, 
in  any  case  the  loan  at  interest  would  also  be  forbidden,  the  ^ 
two  chief  springs,  from  wdiich  inter^^t  flnw.g  tr>  private  persons 
in  the  present  day,  would  be  happily  stopped  up.  But  certain 
opportunities  would  still  remain  open  if  exchange  transactions 
between  individuals  were  not  entirely  forbidden.  Suppose,  fort 
instance,  that  free  exchange  were  allowed  jo  rlnraMe  gnnH^J 
agio  and  interest  would  immediately  slip  in.  as  it  were,  by  a /■ 
back  door.  Say  that  a good  lasts  one  hundred  years,  and  that 
its  (present)  year’s  service  is  worth  £100,  £10,000  must  be 
the  price  of  the  good  if  the  hundredth  year’s  service — rendered 
perhaps  to  some  grandchild  or  great-grandchild — is  to  be 
paid  fuU  £100.  No  man  would  be  willing  to  pay  this  price. 
But  the  moment  that  the  purchase  price  is  calculated  at  less 
than  £10,000,  the  owner  receives,  in  course  of  time,  an  income 
greater  than  the  purchase  price,  and  harvests  the  excess  as 
true  interest. 

But  much  more  important  than  any  such  sporadic  obtain- 
ing of  interest  by_private  individuals  is  the  fact  that,  in  the 
Socialist  state,  the  commonwealth  itself,  as  against  the  citizens, 
would  m^e  use  of  the  pi^ciple  of  interest  wEich  to-daY  it 

reviles  as  “ exploitation  ” and  deduction  from  the  product  of 
labour.  The  Socialist  state,  as  possessing  all  means  of  produc- 
tion, gets  all  the  citizens  to  work  in  its  factories,  and  pays 
them  a wage.  It  conducts,  therefore,  on  the  largest  scale  the 
buying — forbidden  to  private  individuals — of  the  future  good 
Labour.  Now,  on  technieal  grounds,  various  portions  of  the 
labour  it  buys  it  necessarily  sets  to  work  simultaneously  to- 
wards various  productive  ends  widely  removed  in  point  of  time. 
One  group  of  labourers,  for  instance,  it  sets  to  baking ; another 
it  sets  to  sink  mining  shafts,  which,  perhaps,  assist  in  turn- 
ing out  consumption  goods  only  twenty  years  later ; another 
it  sets  to  replant  a forest.  The  labour  directed  to  distant  ends, 
for  reasons  with  which  we  arfi  nnw  fa.Tnilia.r,  obtains  a greater 
t.p,chnica.l  prndnrt^  and  that  product  when  ripe  wUl  possess  also 
a greater  value.  While,  for  instance,  the  produet  that  a baker 
turns  out  in  a day  is  worth,  perhaps,  4s.,  a labourer  engaged  in 


368 


INTEREST  UNDER  SOCIALISM 


BOOK  VI 


w 

3 


forestry  may  plant  one  hundred  oak  saplings  in  a day,  and  these 
saplings,  without  added  labour,  may  mature  in  a hundred  years' 
time  to  strong  oak  trees  worth  20  s.  apiece. 

Now  how  much  can  and  should  the  Socialist  state  pay  as 
wage  to  those  workers  whose  labour  it  directs  to  these  far-away 
\ but  productive  ends  ? Will  it  pay  the  forostprs  thp  whnlp 
\ vahip.  of  thoir  future  product,  sav.  £100  a day? — Tmpo.ssihfe. 
That  would  be  a glaring  injustice  to  the  workers  of  other 
departments.'  If  the  entrance  to  individual  branches  of  employ- 
y^ent  were  left  free  to  all  comers,  everybody  would  he  a forester 
/and  nobody  would  hake  bread;  the  country  would  relapse  to 
j primeval  forest ; and  the  present,  with  its  pressing  needs,  would 
I remain  unprovided  for.^  If,  on  the  other  hand,  the  entrance 
was  not  free,  and  a very  favoured  minority  were  to  be  paid 
£100  a day,  while  the  others  received  4s.  or  6s.,  a plutology 
would  emerge  again  in  optima  forma ; only  that  it  would  not 
be  based,  as  now  on  property,  but,  more  fatally,  on  favour 
and  protection ! 

But  if  foresters  are  paid  exactly  like  bakers  at  4Si_ per  day, 
they  axe  exploited  .just  as  they  are  by  the  capitalist  undertakers 
under  the  present  system.  In  buying  the  future  commodity, 
labour,  an  agio  is  put  on  present  goods,  and  the  labourer, 
instead  of  his  future  product  of  £100,  is  put  off  with  a present 
wage  of  4s.,  which  represents  the  present  value  of  the  planted 
saplings.  But  the  surplus  value  which  these  saplings  take  on 
as  they  grow  into  oak  trees  ready  for  cutting,  the  Socialist 
I commonwealth  puts  into  its  pocket  as  real  interest.  Perhaps, 

' — probably,  it  is  to  be  hoped, — not  to  keep  it  in  its  pocket, 
but  to  employ  it  in  a general  bettering  of  the  wages  of  its 
workers.  But  any  such  supplementary  common  purse  distri- 
bution of  the  interest  thus  pocketed  does  not  make  any  differ- 
ence in  the  fact  that  interest,  as  interest,  has  been  received. 

\ In  this  the  Socialist  state  only  acts  like  a capitalist  in  the 
^ present  day,  who  accumulates  a fortune  from  his  .surplus  values,'^ 

1 It  may,  perhaps,  be  pointed  out  in  reply  that,  owing  to  the  increasing 
supply  of  wood,  its  value  would  be  pressed  down,  and  so,  by  and  by,  forestry 
would  become  only  as  remunerative  as  baking  and  such  like.  I would,  however, 
suggest  that  this  result  would  only  be  reached  when  the  value  of  hundred-year- 
old  timber  had  come  down  to  a halfpenny  ; and  to  press  down  the  value  of  wood 
so  low,  in  the  midst  of  a dense  population,  an  enormous  portion  of  the  country 
would  require  to  be  turned  into  forest  again  ! 


CH.  X COULD  ONLY  BE  DIFFERENTLY  DISTRIBUTED  369 


and  then  (disposes  nf  it  fnr  pnrpnsfts  nf  f,hf>  general  good.  A 
wage  earned  can  be  disposed  of  egoistically  or  altruistically, 
and  interest  received  can  be  disposed  of  egoistically  or  altruis-i 
tically,  but  it  would  be  as  rash  to  assert  that  a wage  becomes' 
an  interest  by  being  egoistically  spent,  as  to  assert  that  an 
interest  changes  its  nature,  and  turns  into  wage,  when  it  is 
altruistically  spent ! 

It  is,  too,  well  worthy  of  remark  that  an  equal  distribution  of 
the  interest  obtained  by  the  Socialist  state  does  not  establish  the ^ 
same  economic  conditions  as  if  the  interest  had  not  been  taken' 
at  all.  In  this  distribution  it  is  not  the  persons  to  whose  labour 
and  product  the  interest  was  due  that  get  the  interest,  but  en- 
tirely different  people.  The  forester  has  an  amount  of  £99  : 16s. 
deducted  from  the  value  of  his  future  product  as  interest.  If, 
now,  through  the  distribution  of  aU  the  interests  thus  obtained, 
the  average  day’s  wage  is  raised  from  4s.  to  6 s.  per  day,  the 
forester  gets  a couple  of  shillings  returned  him  of  the  £99  : 16s. 
taken  from  him ; the  remaining  £99  : 14s.  other  people  get 
and  get,  indeed,  just  as  at  present,  not  by  the  title  of  wage,  bu' 

by  tl^  title  of  property, — or  rather  of  ioint-nronertv.  The' 
people  who  are  employed  in  immediately  remunerative  produc- 
tion, such  as  baking,  and  create  a day’s  product  of  4s.,  could, 
as  labourers,  ask  and  receive  a wage  of  only  4s.  The  other  2 s. 
they  receive  only  because  they  are  at  the  sa,Tnp.  timp.  jnin.t 


owners  in  the  national  wealth,  and  because  the  Socialist  state 
which  administers  the  common  national  wealth,  as  proprietor 
of  this  wealth,  brings  its  entire  right  of  property  to  bear  on 
those  workers  whose  labours  are  directed  to  more  remote  pro- 
ductive ends.  In  the  Socialist  state,  therefore,  exactly  as  in  a 
capitalist  society,  interest  is  deserved  by  the  proprietor  of 
present  goods  as  against  those  labourers  who  creati 
future  product  by  their  labour.  The  only^ifference  is  that  in 
the  capitalist  society  property  is  unequally  divided,  and  interpat, 
falls  to  a few  pronrietors  in  great  amounts^  while  in  the  Socialist 
society  all  are  joint  owners  to  an  equal  amount,  and  all  obtain 
an  equally  small  quota  of  the  total  interest. 

In  the  above  analyses  I have  taken  my  illustration  from 
forestry  because  it  illustrates  the  circumstances  in  question  in 
the  most  striking  and  unambiguous  way.  In  the  most  striking 
way,  because  the  difference  of  time  between  the  forth-putting 

2 B 


/ 


370 


INTEREST  UNDER  SOCIALISM 


BOOK  VI 


of  labour  and  the  receiving  of  the  mature  product,  and,  with 
it,  the  difference  in  value  between  labour  a.iiH  future  product. 
"^is  at  its  maximum,:  in  the  most  unambiguous  way,  because 
here  no  additional  labour  of  any  sort  is  necessary,  and,  conse- 
t^uently,  the  calculation  of  the  final  product  produced  by  a 
definite  expenditure  of  labour  is  quite  simple.  But  it  surely 
needs  no  further  demonstration  that  exactly  the  sa.mp.  rplatinna 
occur,  in  more  or  less  weakened  dearree,  in  the  case  of  all 
labour  which  is  directed  to  more  remote  goals  nf  production. 

They  are  all  technically  more  productive  than  those  which 
yield  their  results  on  the  moment.  Their  abundant  future 
product,  too,  must  always  have  a greater  future  value,  because 
it  could  not,  economically,  have  been  produced  at  all  if  already 
its  present  value,  reduced  by  perspective,  were  not  equal  to  the 
otherwise  normal  value  of  a similar  amount  of  labour.^  Since, 
finally,  the  wage  for  similar  and  similarly  valuable  labour  cannot 
be  assessed  at  different  levels  according  as  the  Socialist  state 
directs  its  labour  to  a near  or  a remote  goal  of  production,  the. 
wage  of  those  labourers  who  are  put  to  more  remote  ta,sks  must. 
Tiece.ssari1y,  be  measured  M?i(f.er__thB  full  value-X)f  their  future, 
product^^  and  this  secures  that,  to  a greater  or  less  extent, 
there  appears  a surplus  gain  for  the  community  which  is  the 
owner  of  the  present  goods.^ 

Nor  does  it  require  any  demonstration  that  the  phenomenon 
of  interest  must  emerge  to  a still  greater-degree  if  the-Socialist 

1 See  above,  p,  310. 

2 The  levelling  up  of  wages — that  is,  up  to  the  value  of  the  future  product  of 
the  most  remuneratively  employed  labour — is,  of  course,  impossible,  because  the 
national  product  would  not  suffice  for  that. 

^ I may  remark  in  passing  that  the  same  position  holds  in  the  case  of  land. 

rent.  It  is  obvious  that,  even  in  the  Socialist  state,  a labourer  working  on  a 

peculiarly  fruitful  piece  of  land,  e.g.  in  a Kiidesheim  vineyard,  will  produce  a 
greater  or  more  valuable  product  than  one  who  puts  forth  the  same  exertion  and 
skill  on  a common  piece  of  land  or  vineyard.  But  it  is  as  evident  that  it  would 
be  insufferable  “protection”  to  allow  the  former  labourers  their  entire  greater 
product  as  wage.  To  avoid  injustice  the  wage  here  must  be  levelled  down  ; that 
is  to  say,  of  the  product  of  the  more  fruitful  lands,  the  “land  rent”  mu.st  be  first 
of  all  retained  for  the  common  purse,  to  be  divided  afterwards  to  all  the  citizens 
in  their  capacity  as  joint,  owners  of  the  national  land.  Land  rent,  therefore, 
pven  in  the  Socialist  state,  would  exist,  would  come  into  operation  as  against 
the  labourers  cultivating  superior  land,  and  would  only  be  divided  according 
to  another  plan  than  now,  on  account  of  the  equal  share  of  all  in  the  nationalised 
land. 


CH.  X INTEREST  INDEPENDENT  OF  ORGANISATION  371 


society  be  organised,  not  nnp.  imitftd  pommunity.  but  as  a 
system  of  independent  economic  proups.^  For  in  this  case,  at 
every  exchange  between  mature  and  immature  commodities, 
each  group  would  appropriate  surplus  value,  not  only  as  against 
its  own  workers  employed  to  remote  productive  ends,  but,  in  a 
much  greater  degree,  as  against  the  other  groups,  and  would 
divide  out  this  surplus  value  to  the  shareholders  of  the  wealth 
belonging  to  the  group,  as  dividend. 

Thus  we  come  to  a very  remarkable  and  noteworthy  result. 
Interest,  which  to-day  the  Socialists  abuse  as  a gain  got  by 
exploitation,  a robbery  from  the  products  of  labour,  would  not 
disappear  eveu  in  the  Socialist  state,  but  would  remain,  in 
promise  and  potency,  as  between  the  community  organised 
under  Socialism  and  its  labourers,  and  must  so  remain.  The 
new  organisation  of  society  may  make  some  change  in  the 
persons  who  receive  it,  and  in  the  shares  into  which  it  is 
divided,  by  altering  the  relations  of  ownership ; but  the  fact 
that  the  owners  of  present  commodities,  in  exchanging  them 
for  future  commodities,  obtain  an  agio,  it  neither  will  nor  can 
alter.  And  here,  again,  it  is  shown  that  interest  is  not  an 
accidental  “ historico-legal  ” category,  which  makes  its  appear- 
ance only  in  our  individualist  and  capitalist  society,  and  will 
vanish  with  it ; but  an  economic  category,  which  springs  from 
filementarv  economic  causes,  and  therefore,  without  distinction 
of  social  organisation  and  legislation,  makes  its  appearance 
wherever  there  is  an  exchange  between  present  and  future 
goods.  Indeed,  even  the  lonely  economy  of  a Crusoe  wo 


not  be  without  the  basis  of  the  interest  phenomenpn,_  the 
increasing  value  of  goods  and  services  preparing  for  the  service 
of  the  future ; only,  of  course,  that,  in  the  absence  of  exchange 
transactions,  there  would  be  wanting  the  chief  occasion  to  put 
exact  figures  on  the  value  of  goods, ‘and  therewith  almost  the 
only  opportunity  of  calling  attention  and  giving  fixity  to  the 
phenomenon. 

> On  these  forms  of  organisation  see  Anton  Menger,  Das  Recht  auf  den  vollen 
Arheiisertrdg,  Stuttgart,  1888,  pp.  104,  112. 


BOOK  VII 


THE  EATE  OF  INTEREST 


CHAPTEE  I 


THE  RATE  IN  ISOLATED  EXCHANGE 


The  exchange  of  present  goods  for  future,  in  which  interest 
has  its  origin,  is  only  a special  case  of  the  exchange  of  goods 
in  general.  It  goes,  then,  without  saving  that  the  formation 


V 

n ^ 


of  price  in  this  case  is  subject  to  the  same  laws  as  govern 

the  formation  of  price  in  economical  exchange  generally.  The 
question  whether  present  goods  in  general  obtain  an  agio,  and 
also  the  further  question  of  the  height  of  that  agio,  are  both  to 
be  answered  according  to  the  rules  laid  down  in  Book  IV.  as 
regards  prices  of  goods  in  general.  What  remains  for  us  here 
is  only  to  amplify  and  vivify  the  colourless  scheme  which 
demonstrated  that  the  current  price  of  goods  is  the  resultant  / 
of  subjective  valuations  coming  together  in  a markeA  by 
pointing  out  those  concrete  circumstances  which  in  this  case — 
the  exchange  of  present  against  future  commodities — influence 
the  mutual  valuation  of  both. 

As  before,  it  is  advisable  to  distinguish  between  isolated  ✓ 
exchange  and  competitive  exchange. 

In  the  exchange  which  takes  place  between  an  owner  of  a 
present  commodity  and  a suitor  for  it,  the  price,  according 
to  the  formula  laid  down  on  p.  199,  will  be  fixed  some- 
where between  the  value  of  the  present  good  to  its  owner  as, 
under  limit,  and  its  value  to  the  suitor  as  upper  hmit.  If,  i 
for  instance,  £100  present  money  are  worth  to  their  owner/ 
exactly  as  much  as  £100  of  next  year’s  money while  to  thej 
suitor  they  are  worth,  on  subjective  grounds  (say,  on  account  of 

^ An  aaanmpHoii  which,  for  the  reasons  shown  on  p.  315,  holds  very  widely  ; 

— that  is  to  say,  among  all  persons  who  own  more  wealth  than  they  can  or  will 
spend  in  their  own  productive  equipment. 


376 


THE  RA  TE  IN  ISOLATED  EXCHANGE  book  vn 


temporarily  pressing  circumstances),  as  much  as  £200  of  next 
year’s  money,  the  price  of  £100  present  money  will  be  fixed 
somewhere  between  £100  and  £200  of  next  year’s  money,  and 
the  agio  at  something  between  nothing  and  100°/-  The 
precise  figure  that  is  fixed,  in  the  individual  case,  within  these 
^ wide  limits,  depends  on  the  skill  and  “ staying  power  ” dis- 
played by  both  parties  in  conducting  the  negotiations.  As 
a rule,  the  owner  of  present  goods  will  be  in  a position  of 

advantage,  because  he  can  do  without  the  exchange  and  yet 
suffer  no  loss,  while  the  suitor  is  often  driven  to  pay  any  price 
for  present  goods.  Hence  the  familiar  cases  where,  in  the 
absence  of  competition,  usuriousiy  high  rates  of  50%,  100%, 
even  200%  and  300%,  are  extorted. 

Wlien  we  go  farther,  and  inquire  as  to  the  deeper  reasons 
which  affect  the  subjective  valuation  of  the  suitors,^  and  thus 
affect  the  economic  upper  limit  of  the  agio,  we  find  them  a 
little  different  in  the  case  of  the  consn-mptinu  Ina.u  from  what 
they  are  in  the  prodjirtirm  Inau^  tn'wTric.h  latter  the  buying  of 
laboui'  is  closely  allied. 

In  the  case  of  the  consumption  loan  the  determinants  are ; 

I — the  urgency  of  want  at  the  time,  the  probable  provision 
/ at  the  time  when  the  loan  is  to  be  paid  back,  and,  finally,  the 
A degree  of  the  suitor’s  underestimate  of  the  future.  The  more 
\ urgently  he  requires  the  loan,  the  more  easily  he  expects  to  be 
V able  to  replace  it  and  the  less  he  takes  thought  for  the  morrow, 
the  higher  the  agio  to  which  he  will,  in  the  worst  case,  consent 
and  vice  versd. 

In  the  production  loan  we  find  different  concrete  deter- 
minants. Here  the  important  thins  is  tbf^  diffp.rp.ucc  in  pro- 
1 ductiveness  between  the  methods  open  to  him  who  get.s_-tha. 
\loan>_aiiiL.thqse_qpen  to  him  who  has  to  do  without.,  it.  To 
recur  to  our  old  illustration.  If  the  fisher,  who  has  no  capital, 
and  can  catch  only  3 fish  a day  by  hand,  gets  a loan  of 
90  fish,  and  is  thus  put  in  a position  to  make  a boat  and 
net  in  the  course  of  a month,  and  with  these  to  catch  30  fish 


^ AS  regards  the  sellers  of  present  goods,  for  simplicity’s  sake,  we  shall,  adhere 
throughout  the  argument  to  the  assumption  that  their  personal  circumstances  are 
such  that  they  value  present  and  future  commodities  alike. 

* We  may  take  the  case,  e.g.,  of  a youth  standing  on  the  brink  of  manhood, 
kept  very  short  of  cash  at  the  moment  by  his  tutor,  but  with  the  prospect  of  a 
great  fortune  coming  into  his  absolute  disposal  in  a few  months. 


CH.  I DETERMINANTS  IN  THE  PRODUCTIVE  LOAN  377 


a day  for  the  remaining  eleven  montns,  the  balance  stands 
as  follows : — without  the  loan  he  catches  in  a year  3 x 365  = 
1095  fish;  with  the  loan  he  catches  nothing  in  the  first 
month,  but  30  per  day  for  the  other  eleven  months,  that  is, 
335  X 30  = 10,050,  or  a surplus  of  8955  fish.  So  long, 
then,  as  he  has  to  give  anything  less  than  8955  (next  year’s) 
fish  for  the  borrowed  90  (present)  fish,  he  gains  by  the 
transaction. 

In  this  illustration  the  difference  in  possible  return  between 
the  two  productive  methods,  and,  with  it,  the  upper  limit  of 
the  economically  possible  agio,  is  absurdly  high — 8955  next\^ 
year’s  units  for  90  present  units  is  something  like  10,000%. 
But  there  will  always  be  a very  important  difference  when  tlm 
choice  lies  between  capitalist  production  and  hand-to-mouth 

production,  as  the  latter  is,  of  course,  always  extremely  un- 
remunerative.  The  difference,  again,  will  tend  to  prow  less, 
\^hen  the  choice  lies  between  two  different  napitalist  methods: 
and  -will  become  more  rapidly  less  in  proportion  to  the  length 
of  the  process  already  secured  without  the  loan.  This  fact  is 
of  very  great  importance  as  regards  the  rate  of  interest,  not 
only  in  isolated,  but  also  in  competitive  exchange.  If  we  put 
it  in  the  clearest  possible  way  now,  it  will  give  a good  basis 
for  what  comes  later. 

In  an  earlier  chapter  I called  attention  to  the  well-attested, 
fact  that  the  lengthening  of  the  capitalist  process  always  leads 
to  extra  returns,  but  that,  beyond  a.  certain  point,  these  extra 
returns  are  of  decreasing  amount.  Take  again  the  case  of 
fishing.  If  what  we  might  call  the  one  month’s  production 
process  of  making  of  a boat  and  net  leads  to  the  return  of  the 
day’s  labour  being  increased  from  3 to  30, — ie.  by  27  fish, — ^it 
is  scarcely  likely  that  tlm  lengthening.  oLthe  proce^  ^ two  or 
^ree  months^vdll  _^uWe  or  treble  the  return.  Certainly  the 
lengthening  it  to  100  months  will ^not Increase  the  surplus  by 
a hundredfold.  The  surplus  return — for  there  will  always  be 
a surplus  return — .will  increase  by  a slower  progr^sion  than 
the  production  _period.  We  may,  thereTore,  mth  approximate 
correctness  represent  the  increasing  productivity  of  extending 
production  periods  by  the  following  typical  scheme. 


378 


THE  RATE  IN  ISOLATED  EXCHANGE  book  vii 


Production  Period. 

Return  per  annum. 

Surplus. 

Without  Capital 

£15 

— 

1 year 

35 

£20 

2 years 

45 

10 

3 „ 

53 

8 

4 „ 

58 

5 

5 ,, 

62 

4 

6 „ 

65 

3 

7 „ 

67 

2 

8 „ 

68  : 10s. 

1:; 

9 „ 

69  : 10s. 

1 

10  „ 

70 

0;: 

It  must  be  understood  that  I do  not  attach  any  importance 
to  these  particular  figures.  Everybody  knows  that,  in  every 
branch  of  production  and  at  every  stage  of  techriical  know- 
ledge, the  figures  will  differ.  In  one  branch  the  fall  of  surplus 
return  may  be  slower,  in  another  it  may  be  more  rapid.  All 
I lay  stress  on  is  the  fact  that  the  figures  express  the  general 
tendency  of  surplus  returns  to  fall. — Assume,  to  complete  the 
hypothesis,  that  a worker  needs  £30  a year  to  maintain  him 
in  suitable  circumstances,  and  let  us  try  to  find  out  on  this 
basis  the  limit  of  the  economically  possible  agio  which  a suitor 
for  productive  credit  may,  in  the  worst  case,  offer  for  a loan 
of  £30  a year. 

If  the  suitor  has  no  capital  whatever,  he  can  get  a return 
of  only  £15  without  the  loan:  with  the  loan,  in  a one  year’s 
production  period  he  can  get  a return  of  £35.  In  the  most 
extreme  case  he  may  therefore,  without  altering  his  position 
for  the  worse  by  the  transaction,  offer  an  agio  of  £20  : that  is 
66|-^.  If,  on  the  other  hand,  the  suitor  already  has  a 
capital  of  .£30  (whence  he  gets  it — whether  it  is  his  own  or 
advanced  from  other  quarters — does  not  affect  the  case),  he 
can,  without  borrowing,  engage  in  a one  year’s  process  and 
obtain  a product  of  £35,  and  all  that  dejends  on  his  getting 
the  loan  is  the  extension  of  the  process  from  one  year  to  two, 
and  the  raising  of  the  return  from  £35  to  £45  ; i.e.  a yearly 
surplus  of  £10.^  Here,  then,  the  suitor  can  eeonnTnir.a.n.y 

1 The  total  surplus  return,  due  to  the  loan,  figures  out  at  £20,  since,  in  each 
of  the  two  years  of  the  extended  production  period,  the  surplus  return  to  labour 
is  £10.  But  this  surplus  return  is  all  the  same  divided  over  two  years,  sn  that. 
only  the  amount  of  £10  is  to  be  reckoned  to  one  Year.  In  more  skilful  disposition, 
however,  the  bon-ower  need  not  take  up,  at  the  beginning  of  the  production 


CHAP.  I FALLS  WITH  EXTENSION  OF  PROCESS 


379 


offer,  at  the  most,  an  a^o  of  £10  on  £30  : i.e.  an  interest  rate 
of  Similarly,  if  the  suitor,  by  whatever  means,  is 

already  equipped  for  a two  years’  process,  the  loan  of  £30  is 
now  the  cause  of  a surplus  return  of  £8  (£53  — £45)  = 
26|-^.  Thus  the  more  ample  the  suitor’s  equipment  is 
already — the  more  capital  he  has — the  lower  fall  the  surplus 
returns  and  the  ratio  of  agio  dependent  on  the  loan.  Tliat  is 
to  say,  the  surplus  falls  to  £5.  £4.  £3.  £2.  30s..  2Qs..  10s..  and 
the  rat^o  16|-,  13;^,  10,  6|-,  5,  3^,  1|-  per  cent.  This  fall  is 
bound  to  emerge  unless  the  returns  obtainable  in  1,  2,  3,  4, 
X production  periods  should  run,  not,  as  we  have  assumed,  in 
the  progression  of  35,  45,  53,  58,  62,  etc.,  but  steadily  in  the 

much  sharper  progression  of  35,  45,  55,  65,  75 105 

1005,  etc.  In  this  latter  case,  on  every  one-year  extension  of 
the  production  period  made  possible  by  the  £30,  there  would 
depend  a constant  surplus  return  of  £10,  and  the  upper  limit 
of  the  economically  possible  agio  would  remain  uniform  at 
33-j%.  But  a ratio  of  increase  like  this  cannot  in  any  case 
go  beyond  a few  stages  in  some  few  productions  it  cannot 
go  on  permanently  and  without  limit  in  any  production. 

We  come,  then,  to  the  important  proposition  that  to  in- 
tendmg  producers,  generally  speaking,  a present  loan  has  less 
value  in  proportion  to  the  length  ■'*1  prAflnotion  periods 

already  provided  for  from  r>i->ipr  gnnrpps  The  proposition 
directly  appHes  to  the  rate  of  interest  in  isolated  exchange, 
inasmuch  as  the  valuation  of  the  borrower  for  productive 

period,  the  whole  amount  of  the  loan  from  which  he  defrays  his  subsistence  dur- 
ing that  period  : he  may  raise  the' loan  by  successive  instalments,- and  this  has  for 
result  that  the  loan  is  outstanding  and  requires  to  pay  interest  only  for  half  the 
production  period.  If  such  a disposition  is  arranged  the  yearly  surplus  return 
may  in  the  most  extreme  case  be  offered  as  a half-year’s  interest  on  the  subsistence 
loan,  and  in  this  case  the  most  extreme  interest  rate  economically  possible  is 
double  the  figures  given  in  the  text.  The  raising  of  such  subsistence  loans  by 
instalments  thus  exerts  exactly  the  same  influence  on  the  relation  between  sub- 
sistence fund  and  surplus  return,  and,  at  the  same  time,  on  the  height  of  the 
interest  rate,  as  does  a suitable  “ Staffelung”  of  production  (see  above,  p.  32.5),  with 
which  phenomenon,  as  may  be  easily  seen,  it  is  closely  and  intimately  connected. 

^ Up  to  a certain  point  the  surplus  return  may  now  and  then  increase  even 
in  a greater  ratio  than  the  duration  of  the  production  period.  It  may,  e.g., 
happen  that  the  transition  from  rod -fishing  to  net -fishing  shows  a greater 
advance  than  the  transition  from  primitive  modes  of  fishing  to  rod-fishing. 
But  beyond  a certain  point  this  cannot  be  maintained,  and  the  surplus  returns 
show  a decreasing  ratio. 


380 


THE  RATE  IN  ISOLATED  EXCHANGE  book  vii 


purposes  directly  gives  the  upper  limit  of  the  economically 
possible  rate.  It  also  allows  us.  however,  to  judge  in  what  direc- 
tion this  proposition  must  influence  the  rate  of  intere&t  in 
competitive  exchange,  where  the  price  is  the  resultant  of  the 
subjective  valuations  of  individuals,  of  whom  many  are  intending 
producers. 

As  has  been  said  above,  the  case  of  productive  credit  is 
closely  related  to  the  case  of  the  purchase  of  labour,  the 
employment  of  productive  labourers  by  the  capitalists  them- 
selves. Here,  however,  there  enter  certain  complications 
which  may  be  as  easily  and  briefly  stated  under  competitive 
exchange.  I shall  not,  therefore,  discuss  them  separately,  but 
shall  go  on  at  once  to  explain  the  rate  of  interest  in  developed 
competitive  exchange. 


THE  RATE  IN  MARKET  TRANSACTIONS 

The  character  of  the  market  in  which  present  goods  are  ex- 
changed against  future  goods  has  already  been  described.^  We 
now  know  the  people  who  appear  in  that  market  as  buyers  and 
sellers.  We  know  that  the  supply  of  present  goods  is  repre- 
sented by  the  community’s  current  stock  of  wealth — with 
certain  unimportant  exceptions — and  that  the  demand  for  them  ^ 
comes  n ) from  the  suitors  for  nroductive  credit  who  wish  to 
equip  themselves  for  their  own  work  in  production,  (2)  from  the 
suitors  for  wage-paid  labour,  and  (3)  from  the  suitors  for  con- 
sumption-credit. - To  these  three  categories  we  may  add,  under 
certain  reservations,  the  maintenance  of  the  landowners.  Finally, 
it  will  be  remembered  that  the  resultant  market  price  must,  as 
a rule,  be  in  favour  of  present  goods,  and  must  lead  to  an  agio 
on  the  same.  What  we  have  now  to  do  is  to _grnnp  tngpthp.r 
the  causes  which  determine  the,  height  nf  thig  agip  in  one 
adequate  and  typical  picture. 

If  we  were  to  attempt  all  at  once  to  draw  a picture  like  this, 
covering,  as  it  does,  the  whole  area  of  the  varied  influences 
that  cross  and  intersect  each  other  on  the  market,  we 
should  meet  with  great,  indeed  insuperable  difficulties,  in  the 
way  of  statement.  I shall,  therefore,  act  on  tlie  principle, 
divide  et  impera,  and  first  consider  how  the  price  is  determined 
xmder  the  assumption  that,  confronting  the  supply  of  present  A 

goods,  there  is  one  single  branch  of  demand,  though,  in  present# 
circumstances,  by  far  the  most  important  branch,  viz.  the^ 
demand  of  the  Wagp,-Ea,mers  Once  we  have  drawn  in  broad 
clear  lines  the  most  important  and  difficult  part  of  the  whole 

^ See  above,  p.  319,  and  particularly  p.  330. 


382 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vii 


picture,  it  will  be  relatively  easy  to  define  the  kind  and  measure 
of  the  share  which  all  the  remaining  market  factors  have  in 
^forming  the  resultant,  and  so  gradually  to  make  the  picture 
true  to  the  full  complexity  of  practical  life.  For  good  reasons 

)I  also  retain  provisionally  the  former  assumption,  that  the 
whole  supply  and  the  whole  demand  for  present  goods  meet  in 

one  single  market  embracing  the  entire  community.  And, 
finally,  we  shall  suppose  meanwhile  that  all  branches  of  pro- 
duction show  the  same  productiveness,  and  also  the  same 
increment  of  productiveness  on  each  extension  of  the  production 
period : that  is  to  say,  we  shall  assume  an  identical  scale  of 
surplus  returns. 

Suppose,  then,  that  in  our  community  the  stock  of  wealth 
in  the  market,  as  supply,  amounts  to  £1500,000,000,  and  that 
there  are  10,000,000  of  wage-earners.  Following  the  scheme 
on  p.  378,  the  annual  product  of  each  worker  increases  in  all 
branches  of  production,  in  proportion  to  the  length  of  the  pro- 
duction period,  from  £35  (in  a one  year’s  process  to  £7  0 
(in  a ten  years’  process).  The  question  is; — in  these  circum- 
^ stances  of  the  market  how  high  wHI  rise  the  aghum  presenl. 
goods? 

It  is  quite  certain,  as  we  have  already  explained,  that  the 
agio  will  settle  at  that  level  where  supply  and  demand  exactly 
^/balance  each  other,  and  this  lies  between  the  subjective  valua- 
tions of  the  last  pair  who  actually  exchange.  But  the  fixing 
of  these  valuations  here  encounters  a quite  exceptional  difficulty, 
and  one  which  does  not  occur  in  any  other  exchange  transac- 
tion, but  has  its  basis  in  a special  peculiarity  of  the  commodity 
“ labour.”  Every  other  commodity,  that  is  to  say,  has  a pre- 
determined subjective  value  to  the  one  who  wishes  to  buy  it. 
Labour  has  not,  and  for  this  reason.  It  is  valned  according 


to  its  prospective  product,  while  the  prospective  product  varies 


according  as  that  labour  is  invested  in  a short  or  in  a long 
production  process.  We  said  above  that,  in  the  subjective 
circumstances  of  the  capitalist,  a sum  of  present  goods  was,  as 

/a  rule,  worth  eis  much  as  the  same  sum  of  future  goods.  The 
capitalist  will,  therefore,  count  the  value  of  labour  equal  to 

1 Tlia  p.aRft  nf  production  carried  on  entirely  without  capital,  which,  accordiug 
to  the  scheme,  would  return  only  £15,  we  may  leave  out  of  account  as  practically 
of  no  importance. 


CH.  II  VALUE  OF  LABOUR  NOT  PREDETERMLNED  383 


just  as  many  present  shillings  as  it  will  bring  him  in  in 
the  future.  But,  according  as  this  labour  is  invested  in  a 
short  or  a roundabout  process,  it  may  bring  him  in  £35  or 
£58  or  £70.  At  which  of  these  figures  is  the  capitalist  to 
value  it  ? 

It  may  be  answered : According  to  the  product  aimed  at  in 
entering  upon  the  method  of  production  which  is,  economically, 
the  most  reasonable.  He  will,  therefore,  value  the  year’s  labour 
at  £35  if,  on  reasonable  grounds,  he  meditates  adopting  a one 
year’s  process;  at  £70  if  he  considers  a ten  years’  period  the/^^ 
most  suitable.  This  would  be  very  well  if  only  it  was 
certain  beforehand  what  period  was  the  most  suitable  for 
the  undertaker.  But  this  is  not  certain : on  the  contrary, 
the  length  of  the  process  is  itself  dependent  on  the  rate 


of  wage  fived  as  resultant  price  on  the  labour  market- 

If  the  wage,  for  instance,  stands  at  £25,  a one  year’s  process 
is  the  most  favourable  for  the  undertaker.  At  £25  he 
gains  £10  in  the  year — or,  to  put  it  exactly,  in  the  six 
months,  since,  on  the  average,  the  advance  extends  over  only 
six  months ; ^ that  is,  80^  per  annum.  In  a ten  years’  pro- 
cess for  the  £25  in  wages  he  gets  £70,  and  the  surplus 
return  of  £45  is,  absolutely,  much  greater,  but,  when  divided 
as  profit  over  an  average  of  five  years,^  gives  only  £9  for  one 
year,  or  a profit  of  36%.  On  the  other  hand,  if  the  year’s 
wage  is  £50,  it  is  quite  clear  that  it  would  be  as  absurd  to 
choose  a one  year’s  process7  with  its  product  of  £35.  as  it  was 
most  reasonable  in  the  previous  circumstances,  and  only  those 
longer  production  periods  which  show  an  annual  product  over 
£50  could  be  thought  of. 

The  matter,  therefore,  stands  as  follows.  Elsewhere,  in 
the  case  of  other  commodities,  th^  pinpInympTif.  for  which  the 
buyers  wish  to  acquire  them  is  already  determined.  It  is  the/ 
fixed  point, — the  thing  which  first  of  all  helps  to  determine 
the  price  offered  by  the  buyers,  and  then  through  that  the 
resultant  market  price.  Here,  in  the  case  of  the  comTundity 


/ 


^ OnlY  the  wages  of  the  first  month  are  outstanding  nearly  a whole  year..: 
those  of  the  second  month  are  outstanding  only  eleyen  months,  and  so  on  ; all 
wages  of  the  first  six  months  outstanding  more  than  half  a year.  Against  this 
the  wages  of  the  second  six  months  are  outstanding  for  as  much  less  than  the 
half-year. 

^ The  calculation  is  exactly  similar  to  the  foregoing. 


384 


THK  RATE  IN  MARKET  TRANSACTIONS  book  vii 


Labour  on  the  contrarY.  the  employment  is  an  undetermiTiftf^ 

amount,  an  x,  which  is  first  determined  by  the  resultant  price. 

In  these  circumstances  it  is  clear  that  the  fixed  point  of  the 
price  transactions  must  be  got  somewhat  differently  from  the 
ordinary  way ; not,  of  course,  according  to  different  principles 
or  laws,  but  with  a certain  casuistical  modification  in  detail 
which  we  have  now  to  examine.^ 

In  place  of  the  fixed  point,  which  is  not  available  because 
the  employment  of  the  labour  itself  is  not  fixed,  we  find  a 
substitute  in  the  fact  that  another  amount,  usually  indetermined, 
is  here  fixed,  viz,  the  quantities  sold.  It  may  be  taken  as 
certain  that  all  the  labour  offered.  like  the  whole  snTn  nf 

present  goods  offered,  finds  a market.  The  certainty  of  this 
is  based  on  a peculiar  circumstance.  Exactly  as,  in  the  " 
science  of  money,  it  is  a familiar  dogma  that,  in  the  long-run, 
any  sum  of  money,  be  it  great  or  small,  is  sufficient  to  do  the 
work  of  circulation  in  a community,  so  is  it  true  that  any 

1 Perhaps  one  or  other  of  my  readers  will  take  exception  to  my  looking  upon 
the  production  period,  in  which  the  work  of  undertaking  is  carried  on,  as  not 
a fixed  immovable  amount.  It  will  be  said  that  each  undertaker  haa  madp. 
the  arrangements  for  his  production  on  a quite  definite  footing,  and  works  in 
any  case  in  the  production  period  corresponding  to  and  determined  hy  these 
given  arrangements.  This  is  not  the  case.  Even -where  the  visible  outlines  of 
the  arrangements,  such  as  workshops,  number  and  kind  of  employes,  and  so 
on,  may  be  pretty  permanent,  yet,  within  these  fixed  lines,  a number  of  litt.lp 
noticed  alterations  are  possible,  by  which  the  length  of  the  production  perind 

might  be  changed  not  inconsidetablY,  In  the  simplest  shoemaking  shop,  e.g., 
the  buying  of  a new  machine-made  tool,  th®  wholesale  purchase  of  finished 
uppers,  or,  above  all,  the  acquiring  of  labour-saving  instruments  such  as  sewing- 
machines  and  the  like,  involves  no  unimportant  extension  of  the  production 
period.  True,  in  the  shoemaking  shop  itself  one  does  not  notice  that  the  pro- 
duction of  shoes  has  now  become  a more  lengthy  process.  But  all  the  more 
noticeable  will  it  be  in  those  preparatory  stages  of  production  where,  on  account 
of  the  shoemaker’s  demand — not,  of  course,  the  demand  of  the  one  shoemaker, 
but  of  many, — people  jnust  now  stretch  away  back  in  time,  as  it  were,  and 
invest  original  productive  powers  in  machine-making,  founding  nf  factories,  and 
so  on.  The  shoemaker,  therefore,  according  as  he  covers  his  demand  for  the 
instruments  of  his  business  in  one  way  or  the  other,  may  as  a fact  cause  a 
lengthening  or  shortening  of  the  total  production  period,  and  naturally  he  makes 
the  choice  which,  in  the  circumstances,  is  economically  the  more  advantageous. 

If,  e.g.,  the  level  of  wages  is  very  high,  he  will  prefer  to  buy  machine-made 
uppers,  put  up  a sewing-machine  in  his  own  shop,  etc.  ; that  is  to  say,  in  entire 
correspondence  with  the  statement  given  in  the  text,  he  will  prolong  the  produc- 
tion^perisd : while,  if  the  level  of  wages  is  low,  he  will  prefer  directly  to 
employ  the  cheap  hand  labour, — that  is  to  say,  so  far  as  in  him  lies,  to  keep  the 
production  period  short. 


CHAP.  II  PRESENT  WEALTH  BUYS  UP  LABOUR 


385 


five  hundred  millions  of  capital 
on  that  account : only,  of  course, 

a 


sum  of  present  goods,  be  it  great  or  small,  is  sufficient  to  buy 
up  the  whole  supply  of  wage  labour  that  exists  in  the  com- 
munity, and  to  pay  its  wages.  All  that  requires  to  be  done 
is  to  contract  or  extend  the  production  neriod^.  If  there  are 
ten  million  wage  workers,  and  fifteen  hundred  millions  of 
capital,  this  stock  is  just  sufficient  to  pay  the  ten  million 
workers  £30  a year  each  over  a ten  years’  production 
process.^  If  there  are  only 
no  labourers  need  go  idle 

they  cannot  ha’i'e  their  maintenance  advanced  them  for 
ten  years’  process,  but  (at  the  same  wage  of  £30)  only  for 
a three  and  a third  years’  process,  and  the  average  duration 
of  the  production  period  must  be  curtailed  accordingly.  Sup- 
pose there  are  only  fifty  millions  of  capital,  all  the  labour 
covdd  still  be  bought,  but  now  only  for  a four  months’  process. 
and  it  must  be  secured,  by  a further  shortening  of  the  produc- 
tion period,  that  the  scanty  amount  of  present  goods  is  renewed 
after  every  short  period  by  the  accession  of  fresh  returns. 

It  is,  therefore,  always  possible  for  the  existing  stock  of 
wealth  to  buy  all  the  labour,  and  there  are  certain  reasons  in 
this  case  that  work  very  strongly  towards  always  making  the 
possible  into  the  actual.  Between  capitalists  and  labourers 
the  economic  conditions  are — with  very  few  exceptions — ex- 
tremely favourable  to  the  effecting  of  exchange.  The  labourers 
urgently  need  present  goods,  and  cannot,  or  can  scarcely 
turn  their  own  labour  to  any  account ; they  will,  therefore, 
to  a man  rather  sell  their  labour  cheaply  than  not  sell  it 
at  all.  But  very  much  the  same  is  true  of  the  capitalists. 
In  their  peculiar  circumstances  of  want  and  provision  for  \ 
want,  theii'  present  goods — which  they,  in  any  case,  would  j 
lay  up  against  the  future — are  not  worth  more  to  them  ‘ 
than  a similar  sum  of  future  goods.  They  will,  therefore, 
prefer  any  purchase  of  labour  where  there  is  an  agio,  how- 
ever little  it  may  be.  rather  than  let  their  capital  lie  dead; 
and  the  consequence  is  that  aU  capital,  like  all  labour,  actually 
comes  to  a sale.  As  a fact  we  see  that,  in  all  economic  com- 
munities, although  the  quantitative  relations  between  wealth 

^ On  the  assumption  of  a production  arranged  in  the  form  of  stages,  whereby 
(as  shown  on  p.  328,  and  in  Appendix  I.)  the  initial  fund  need  only  contain  sub- 
sistence  for  half  the  production  period. 

2 C 


y 


/ 


386 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vij 


and  number  of  wage -earners  are  extremely  various,  these  two 
amounts  exactly  buy  up  each  other.  There  are  everywhere 
a few  labourers  who  have  no  work,  and  a few  capitals  which 
are  not  employed,  but  this  is,  of  course,  not  in  contradiction 
to  what  has  been  said.  I need  scarcely  point  out  that  the 
presence  of  such  unemployed  is  never  traceable  to  the  pur- 

chasing power  of  capital  being  insufficient  to  the  whole 
number  of  the  labourers — in  a poorer  country,  indeed,  a 
capital  of  half  the  amount  would  have  to  pay  the  same  number 
of  labourers,  and  actually  does  pay  them — but  always  to 
jcertain  frictional  and  temporary  disturbances  of  organisation, 
ssuch  as  are  inevitable  in  a mechanism  so  complicated  as  the 
lindustrial  division  of  labour  in  a great  country. 

' We  may,  therefore,  assume  it  as  certain  that  the  whole 
/supply  of  labour,  and  the  whole  supply  of  present  goods,  come 
Ito  mutual  exchange.  Tn  this  fact  the  lengtk  of  the  produc- 
tion period,  and  thus  the  amount  of  product  which  the  under- 
taker may  obtain  through  the  labour  be  bny.<s,  obtains  a.  certain 
definiteness.  That  is  to  say,  we  must,  in  any  case,  assume 
such  a period  of  production  that,  during  its  continuance,  the 
entire  disposable  fund  of  subsistence  is  required  for,  and  is 
sufficient  to  pay  for,  the  entire  quantity  of  labour  offering 
itself  If  the  period  were  to  be  shorter  than  this,  some 
capital  would  remain  unemployed ; if  longer,  all  the  workers 
could  not  be  provided  for  over  the  whole  period ; the  result 
would  always  be  a supply  of  unemployed  economic  elements 
urgently  offering  their  services,  and  this  could  not  fail  to 
upset  the  offending  arrangements.^ 

But  we  are  not  yet  finished  with  the  subject.  It  is  not 
one  single  definite  production  period  that  harmonises  with 
the  above  assumption,  but  a great  many  different  periods. 


^ If,  e.gf.,  the  existing  stock  of  subsistence  is  so  great  as  to  defray  four 
million  years’  pay — in  which  case,  as  we  know,  where  production  is  by  stages,  an 
initial  capital  amounting  to  two  millions  of  wages  only  would  be  required — and 
if  there  are  one  million  labourers  in  the  country,  then  it  is  shown  that  an 
average  four  years’  production  period  must  be  taken.  For  if,  say,  a three  years’ 
period  were  taken,  the  three  years’  payment  of  one  million  of  workers  would  take 
up  only  a capital  of  one  and  a half  millions  of  wage,  and  the  rest  of  the  capital 
would  have  to  pjo  idle.  In  a five  years’  production,  again,  an  initial  fund  of 
two  millions  of  wages  would  only  defray  the  subsistence  of  800,000  labourers  for 
five  years,  and  the  remaining  200,000  would  go  starving — a position  which 
evidently  is  as  untenable. 


CHAP.  II 


AT  VARIOUS  RATES  OF  WAGE 


387 


Obviously,  given  the  capital  and  the  number  of  workers,  a 
very  varying  number  of  years  can  be  provided  for  according 
as  the  wage  of  labour  is  high  or  low.  With  a capital  of 
fifteen  hundred  millions  for  instance,  our  ten  million  workers 
can  be  kept  in  work  and  wage  for  ten  years  at  a wage  of  £30, 
or  for  five  years  at  a wage  of  £60,  or  for  six  years  at  a wage 
of  £50.  Now  which  of  these  possible  cases  will  be  the  one , 
actually  adopted  ? — This  will  be  determined,  by  the  play  of/ 
the  same  egoistic  motives  as  rp.giilat.p.  t.bp.  formation  nf  pripp. 
competition  generally,  in  the  following  way. 

Assume  for  a moment  that  the  usual  wage  is  £30.  A 
capitalist  then  with  £1000 — for  convenience  sake  we  shall 
take  this  amount  as  the  unit  throughout  the  following  discus- 
sion— may  employ  either  6 6 '6  labourers  in  a one  year’s 
process,  or  33’3  labourers  in  a two  years’  process,  or  22'2  in  a 
three  years’  process.^  Naturally  he  will  choose  the  process 
which  he  finds  most  advantageous.  Which  process  that  is  will 
be  seen  from  the  following  table,  based  on  the  former  scheme 
of  productivity  on  p.  378,  showing  how  many  workers  can 
be  employed  by  £1000  in  each  production  period,  and  how 
much  annual  profit  may  be  got  from  that  sum. 

^ I here  assume  a well-organised  production  by  stages,  where  no  portion  of 
the  capital  remains  idle,  and  where,  consequently,  the  initial  fund  need  only 
contain  something  like  half  the  amount  of  subsistence  required  during  the  course 
of  the  whole  production  period.  I may  note,  however,  that  the  correctness  of 
the  conclusions  drawn  in  the  tezt  is  quite  independent  of  the  pure  question  of 
fact  whether  the  initial  capital  must  be  exactly  half,  or  something  more  than 
half,  or,  perhaps,  just  so  much  as  the  amount  of  subsistence  successively  con- 
sumed by  the  workers  during  the  production  period.  According  as  this  is 
determined  the  figures  put  down  in  the  following  tables  will,  of  course,  vary — 
they  have  no  value,  indeed,  but  as  illustrative — but  not  the  laws  that  underlie 
these  figures.  With  other  figures  representing  the  productiveness  and  the 
capital,  the  calculation  would  lead  to  different  concrete  rates  of  interest,  but  to 
the  same  laws  as  regards  height  of  the  intetest  rate,  as  will  be  shown  more  clearly 
further  on. 


388 


THE  RATE  IN  MARKET  TRANSACTIONS  tjook  vii 


TABLE  V 
Wage  £30. 


/y \ Production 


Poe. 

y&ziR.i 


/ 

X 

3 

Vi' 


Period  in 
years. 


N 

1 

2 

3 

4 

5 

6 

7 

8 
9 

10 


Annual 

Product. 


p 

£35  0 

45  0 

53  0 

58  0 

62  0 
65  0 

67  0 

68  10 

69  10 

70  0 


Annual  profit 
per 

labourer. 


G 

£5  0 

15  0 isi 

23  0 ^ 

28  0 
32  0 

35  0 

37  0 

38  10 

39  10 

40  0 


Number 

of 

employed. 


U3S. 

66-66 

33-33 

22-22 

16-66 

13-33 

llfl 

9-52 

8-33 

7-4 

6-66 


Total  annual 
profit  on  the 
£1000. 


£333-30 

500 

511-11 

466-66 

426-66 

388-85 

352-24 

320-82 

292-5 

266-66 


m the  given  circumstances  of  all 
the  factors,  it  is  most  profitable  for  the  undertakers  to  dp.votft 

tJ^in.seIvpA  to  a three  years’  production  period.  They  obtain 
tliereby  the  very  considerable  rate  of  51-1%,  while  both  in 
the  longer  and  in  the  shorter  processes  the  profit  is  lower 
In  these  circnmstances  naturally  all  undertakers  will  .seek  to 
adopt  this  length  of  process^  But  to  what  does  this  lead? 
In  a three  years’  process  £1000  can  employ  22-2  workers, 
and  therefore  to  employ  all  the  available  capital  in  the 
community  (viz.  £1500,000,000)  33^  million  workers  would 


^ To  be  exact  the  figures  of  profit  from  the  larger  nerinris  nf  prndiicHnTi  gbnnid 
be  .set  down  at  somewhat,  Ips.s.  They  fall  due,  of  course,  all  at  once  at  the  end 
of  the  total  production  period,  and  are  thus  less  in  value  by  the  amount  of  the 
intermediate  interest.  In  a ten  years’  production  period,  e.g.,  the  capital  of 
£1000  realises  a total  profit  of  £2666-6,  which  is  less  favourable  than  £266-66 
for  each  single  year,  because  in  the  latter  case  the  interests  falling  due  earlier 
might  increase  by  compound  interest.  I consider  it,  however,  less  of  a mis- 
take to  give  up  mathematical  exactness  than  to  include  involved  calculations 
of  compound  interest,  and  make  the  illustration  so  difficult  and  circum- 
stantial that,  in  the  end,  it  might  be  perhaps  more  difficult  to  understand  than 
the  rule  which  I mean  it  to  illustrate.  It  is  not  committing  any  blunder  in 
principle : the  neglect  of  compound  interest  leads  only  to  the  same  result  as  if.T 

had  made  the  progression  of  the  annual  returns — which  in  any  case  is  arbitrary 
and  only  given  for  purposes  of  illustration — a little  more  rapid,  and  then  had 
calculated  exactly. 


CHAP,  n 


AT  VARIOUS  RATES  OF  WAGE 


389 


be  needed — while  there  are  only  ten  millions.  These  ten 
million  workers  could  be  employed  by  a sum  of  four  and  a 
half  million  pounds,  leaving  capital  to  the  amount  of  ten  and  a 
half  millions  lying  idla  Of  course  these  ten  and  a half 
millions  of  capital  could  not  and  would  not  remain  so : they 
would  compete  for  employment ; attract  labourers  by  offering 
higher  wages ; and  the  necessary  result  would  be  a rise  of  the 
rate  of  wages.  The  £30  rate,  then,  assuming  the  above 
position  of  the  factors,  cannot  possibly  be  a permanent  one. 

Suppose  now  that  the  rate  of  wages  is  £60,  we  get  the 
following  table. 

TABLE  II. 

Wage  £60. 


Production 
Period  in 
years. 

Annual 

Product. 

Annual  profit 
per 

labourer. 

Number 

of 

employed. 

Total  profit 
on  the 
£1000. 

1 

£35 

0 

—£25 

0 

33-33 

Loss 

2 

45 

0 

— 15 

0 

16-66 

3 

53 

0 

— 7 

0 

11-11 

)) 

4 

58 

0 

— 2 

0 

8-33 

5 

62 

0 

2 

0 

6-66 

£13-33 

6 

65 

0 

5 

0 

5-55 

27-77 

7 

67 

0 

7 

0 

4-76 

33-33 

8 

68 

10 

8 

10 

4-16 

35-41 

9 

69 

10 

9 

10 

3-70 

35-15 

10 

70 

0 

10 

0 

3-33 

33-33 

This  table  proves  that,  i.£-wp  assnmp  £60  as  the  rate, of 
wages,  production  in  anything  less  than  a five  years’  period  shows 
a positive  loss,  while,  of  the  longer  periods,  the  eight  years’ 
process  i.s  the  most  prnfitnblp.  It  yields  the  modest  interest 
of  3'54^,  but,  relatively  speaking,  it  is  the  most  favourable 
rate  that  can  be  got.  It  is  easy  to  see,  however,  that  it  is  as 
impossible  for  a wage  of  £60,  as  it  was  for  £30,  to  be  the  defin- 
ite resultant  price  of  labour.  Under  the  assumed  circumstances 
of  productivity  the  eight  years’  period  is  the  most  profitable 
length  of  process  at  a £60  rate  of  wage.  By  adopting  it  a 
capital  of  £1000  can  employ  only  4'16  labourers;  consequently 


390 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vn 


tha^ntire  capital  of  £1500.000.000  can  employ  only  six  and 
a quarter  million  workers  ; and  the  remaining  three  and  three- 
quarter  millions  must  starve.  This  again  is  impossible ; the 
unemployed  will  offer  their  services  in  competition  with  each 
other ; and  wages  will  be  pressed  below  the  rate  of  £60. 

At  what  point,  then,  will  this  overbidding  and  under- 
bidding, which  come  from  unemployed  capital  when  wage  is 
too  low  and  from  unemployed  labour  when  wage  is  too  high, 
/come  to  an  end  ? Obviously  it  will  be  when  the  most  reasoa- 
ahle  production  period  exactly  absorbs  the  wage  fund^  oji  The 
one  side,  and  the  labour  offered  on  the  other^  This  will  be  the 
case,  as  the  following  table  shows,  at  a wage  of  £50. 

TABLE  III. 


Wage  £50. 


Production 
Period  in 
years. 

Annual 

Product. 

Annual  profit 
per 

labourer. 

Number 

of 

employed. 

Total  profit 
on  the 
£1000. 

1 

£35 

0 

— £15 

0 

40 

Loss 

2 

45 

0 

— 5 

0 

20 

3 

53 

0 

3 

0 

13-33 

£40 

4 

58 

0 

8 

0 

10 

80 

5 

62 

0 

12 

0 

8 

96 

6 

65 

0 

15 

0 

6-66 

100 

T 

67 

0 

17 

0 

5-71 

97-07 

8 

68 

10 

18 

10 

5 

92-5 

9 

69 

10 

19 

10 

4-44 

86-66 

10 

70 

0 

20 

0 

4 

80 

At  a wage  of  £50  the  six  years’  production  period  proves 
the  most  profitable.  It  gives  an  interest  of  10%  on  the  in- 
vested capital,  whUe  a five  years’  process  would  return  only 
9‘6%,  and  a seven  years’,  9'7%  Moreover,  as  at  that  wage 
the  £1000  employs  6|-  labourers,  the  entire  ten  million  workers 
and  the  entire  fifteen  hundred  millions  of  capital  find  employ- 
ment ; and  the  point  is  reached  where  the  form  a ti  on  _ of  pricg 
may  come  to  rest.  AH  who  have  it  in  their  power  to  disturb 
the  settlement  by  further  over  or  under  bidding  have  no 
inducement  to  do  so,  and  all  who  might  have  an  inducement 


CHAP.  II 


EQUILIBRIUM  REACHED 


391 


have  not  the  power,  as,  on  economic  grounds,  they  are  already 
excluded  from  competition.  There  is  no  idle  capital  which 
might  be  tempted  to  seek  employment  by  overbidding,  and 
there  are  no  idle  labourers  who  might  be  tempted  to  seek 
employment  by  underbidding.  And,  finally,  the  undertakers 
who  have  placed  their  production  on  the  footing  which  makes 
this  favourable  position  of  things  possible  are  rewarded  bv  this 
arrangement  being  at  the  s-giue  timp  tbp.._jnn.cit  profitable  for 
them,  and  they  too  have  no  inducement  to  make  any  change. 

Those  tmdertakers,  on  the  other  hand,  who  might  have  wished 
to  engage  in  longer  or  shorter  processes,  and  would  thus  have 
made  either  capital  or  labour  insufficient,  are  excluded  from 
any  such  disturbing  competition  by  the  fact  that  such  methods 
of  production  show  either  a loss  or  a smaller  profit. 

The  price  of  labour,  then,  will  and  must  settle  at  a wage 
of  £507~and  this  involves,  at  the  same  time,  an  agio  of  10% 
on  present  goods.  I say,  it  must  do  so,  for,  so  long  as  this 
point  is  not  reached,  there  are  certain  tendencies  always  at 
work  to  force  the  price  towards  it.  If,  for  example,  the  wage 
were  only  a little  higher,  say  £51,  the  six  years’  process  would 
still  be  the  most  profitable,  but  only  9,800,000  labourers 
could  be  employed  by  the  available  capital  of  £1500,000,000; 
the  unemployed,  by  the  urgency  of  their  circumstances,  would 
exert  a pressure  on  the  price  of  labour,_till  such  time  as  they 
also  could  be  taken  in,  which  would  be  the  case  when  wage 
came  down  to  £50.  If,  on  the  contrary,  the  wage  were  a 
little  lower,  say  £49,  the  employment  of  the  ten  million  workers 
would  take  up  only  £1470,000,000  of  capital;  the  unemployed 
remainder  would  attract  employment  through  overbidding ; and 
the  result  again  would  be  a rise  of  wage  till  such  time  as  the 
point  was  reached  at  which  equilibrium  all  round  could  take 
place. 

In  the  assumed  state  of  all  the  factors  an  agio  of  10% 
is  therefore  the  economically  necessary  result.  Why  exactly 
10%  ? — The  considerations  hitherto  presented  can  only  answer 
v^atively  that  the  necessary  equilibrium  could  haye  been 

^ Leaving  out  of  accoant  special  disturbing  canaes,  the  influence  of  which 
I cannot  pursue  here  : my  business  just  now  is  to  develop  the  fundamental  law 
of  the,  interest  rate,  just  as  I have  already  developed  the  fundamental  law  of  the 
formation  of  price.  See  Conrad’s  Jahrbiicher,  vol.  xiii.  p.  480. 


392 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vii 


reached  at  no  other  rate  of  interest.  But  we  niay  now  inquire 
whether  our  figures  do  not  bring  out  some  other  circumstances 
which  may  positively  indicate  a rate  of  10%,  and  give  us 
matter  for  a precise  positive  law  of  the  interest  rate. 

To  arrive  at  a position  of  equilibrium,  the  capital  of  the 
community  had  to  be  taken  out  of  shorter  processes  where 
full  employment  could  not  be  found  for  the  existing  stock  of 
labour,  and  employed  in  gradually  extending  methods  till  all  the 
labourers  were  fully  occupied.  This  was  arrived  at  in  the  six 
years’  process.  On  the  other  hand,  the  adoption  of  still  longer 
processes,  for  which  again  the  capital  is  not  sufficient,  had, 
economically,  to  be  prevented.  In  these  circumstances  the 
six  years’  producers  are  the  last  buyers,  the  “ marginal  buyers 

the  would-be  seven  years’  producers  are  the  most  capable 
excluded  suitors  for  means  of  subsistence ; and,  according  to 
our  well-known  law,  the  price  that  results  must  fall  between 
the  subjective  valuations  of  these  two.  How  does  it  stand 
with  these  valuations  ? 

What  we  have  to  look  to  simply  is : What  is  the  utility 
which,  for  those  two  sets  of  buyers,  depends  on  the  disposal  over 
a definite  sum  of  means-  of  subsistence  ? Here,  first  of  all,  it 
may  be  put  down  generally  that,  nu  the  dispn.sn.l  nypr  p.ar.b 
half  year’s  wage.  — in  the  present  case,  £25, — depends  one 
year’s  extension  of  the  production  period  per  worker.^  Accord- 
ingly, with  respect  to  the  six  years’  producers,  it  specially 
depends  on  their  possession  or  non -possession  of  the  £25 
whether,  as  regards  one  labourer,  they  can  embark  on  or 
continue  in  the  six  years’  process  instead  of  the  shorter  five 
years’  process.  But  according  to  our  scheme  of  productivity 

^ Always  assutninp-  a complete  'arranp^ement,  of  production  b-y  stages,  I may 
add  the  mathematical  proof  of  this  somewhat  paradoxical  thesis.  To  employ  30 
labourers  in  a 5 years’  period  arranged  by  yearly  stages,  the  6 labourers  of  the  fiist 
stage  need  an  advance  of  wage  over  full  5 years,  that  is,  in  all,  30  annual  wages  : 
the  6 labourers  of  the  second  stage  require  an  advance  over  4 j^ears,  that  is,  24 
wages  : similai-ly,  the  labourers  of  the  third  stage  require  18,  those  of  the  fourth 
12,  those  of  the  fifth  6 : a total  of  90  wages.  To  support  the  same  30  labourers 
in  a S ye.!^Ig’  production,  the  first  stage,  now  embracing  only,  5 labourers,  requires 
the  advance  for  6 years,  that  is,  30  wages  ; the  second  stage,  25  ; the  third, 
20  ; the  others,  respectively,  15,  10,  and  5 wages : in  all.  105  wages.  The 
extension  of  the  production  period  for  30  labourers  by  a whole  year  requires 
therefore,  as  a fact,  the  augmenting  of  the  wage  fund  bv  the  amount  of  only 
p5  wages,  which  gives  the  case  maintained  in  the  text. 


CHAP.  II  THE  LAST  EXTENSION  OF  PRODUCTION 


393 


the  year’s  return  of  one  worker  in  a five  years’  process  amounts 
to  only  £62,  while  in  a six  years’  process  it  amounts  to  £65. 
What,  therefore,  as  regards  the  marginal  buyer,  depends  on 

his  having  the  cli.sposal  over  £25.  is  the  obtaining  of  a yearly 

surplus  product  of  £3.  On  the  other  hand,  those  would-be 
producers  whcJ  are  trying  to  take  means  of  subsistence  out  of 
the  market  in  order  to  extend  the  production  period  to  a 
seventh  year,  could  gain  by  their  extension  only  a surplus 
return  of  £2  (£67  — £65).  For  them,  therefore,  all  that  depends 
on  their  disposal  over  the  £25  is  a surplus  of  £2,  and  they  are 
excluded  from  competition  inasmuch  as  the  resultant  price  has 
established  an  agio  which  exceeds  the  rate  of  2 on  25  (8%). 

If  therefore — and  this  is  indispensable  to  equilibrium 
being  reached — the  extension  of  the  production  period  is  to 
halt  at  the  limit  of  six  years,  the  agio  established  by  the  fixing 
of  the  price  must  lie  between  the  rate  that  rppr‘^°onts  the 
valuation  of  the  last  buyers  (£3  on  £25,  or  12^)  as  upper 
limit,  and  the  rate  representing  the  valuation  of  the  competitors 
first  excluded  (8^)  as  lower  limit.  And  thus  our  former 
empirical  and  circumstantial  demonstration  of  the  rate  of  wage 
and  the  rate  of  interest  at  which  equilibrium  may  be  reached 
on  the  market,  must  point  provisionally  to  the  rate  of  10^. 
It  must  at  least  point  to  the  zone  between  8%  and  12^. 
The  fact  that,  within  this  zone,  the  rate  of  10^  is  exactly 
brought  out,  is  due,  of  course,  not  to  the  limitations  indicated 
by  the  valuations  of  the  marginal  pair,  but,  as  described  on 
p.  215,  simply  to  the  quantitative  effect  of  supply  and 
demand.  W''e  shall  see  immediately,  however,  tliat  the  wide 
latitude  (8^  to  12^)  which  our  abstract  scheme  leaves  for 
the  narrowing  action  of  supply  and  demand,  looks  considerable 
only  on  account  of  the  figures  accidentally  chosen  ; in  practical 
life  the  latitude  given  is  almost  always  vanishingly  small. 

Meanwhile  we  may  put  the  results  at  which  we  have 
arrived  in  general  form  as  follows ; — 

The  rate  of  interest — on  the  assumptions  already  madcT — 
is  limited  and  determined  by  the  productiveness  of  the  Iasi 
extension  of  process  economically  permissible,  and  of  the  further 
extension  economically  not  permissible ; m this  way  tfa»t  the 
unit  of  capital,  which  makes  this  extension  of  process  possible, 
must  always  bear  an  amount  of  interest  less  than  the  surplus 


394 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vii 


return  of  the  first-named,  and  more  than  the  surplus  return  of 
/the  last-named  extension.^  Within  thpsp  marginal  limits  the 
/ price  may  be, more  exactly  determinecLJjy  the  quantitative 
/ relation  h.etvveen— seage  fund  and  number  of  workers,  according 
to  the  law  of  supply  and  demand. 

In  practical  life,  however,  the  latter  method  of  determining 
price  is  seldom  taken.  It  is  true  that  in  our  abstract  scheme 
there  was  an  miusually  wide  latitude  to  come  and  go  on, 
because  we  had  assumed  a sudden  decrease  of  the  surplus 
return  from  £3  to  £2  ; that  is,  a fall  of  fully  one-half.  But 
in  practical  life  sudden  differences  like  this  scarcely  ever  occur. 
The  figures  which  represent  the  productiveness  of  the  last 
permissible  and  the  first  non -permissible  extension  come 
ii.snally  very  dose  to  each  other,  and,  consequently,  they  are 
sufficient  to  limit  the  variations  of  the  interest  rate  so  strictly 
^and  sharply  that  the  theoretically  more  exact  determination 
by  means  of  tlie  relation  of  supply  and  demand  is  practically 
unimportant.^  Indeed,  assuming  that  these  two  marginal 
limits  are  very  near  each  other,  one  of  them  may  even  be  left, 
out  of  account  without  any  serious  inaccuracy,®  and  the  law 
\ be  simply  formulated  thus : — The  rate  is  determined  by  the 
surplus  return  of  the  last  permissible  extension  of  production. 

This  coincides  almost  to  a word  with  Thlinen’s  celebrated  law 
which  makes  the  rate  of  interest  depend  on  the  productiveness 
I of  the  “ last  applied  dose  of  capital.”  ^ 


^ From  this  formulation  U _wi1)  be  seen  why  the  law  now  flp.Hnnfiil  does 
jiot  depend,  and  ha.s  no  nesd  to  depend,  for  its  CQrredaxfi.ss  oii_  the^xonereta 
numerical  ratio3^tsKeiL_the_„ampuin  of  the  wage  fund  and  the -length,  of-the 
productiou-pfiimil.  (See  above,  p.  387,  note  1.)  Suppose,  e.g.,  that  not  a half 
but  a whole  year’s  wage  were  necessary  to  extend  the  production  period  by  a 
year;  all  the  same  a capital  sufficient  to  defray  the  wages  of  a whole  year  would 
require  to  bear  something  like  the  return  of  the  last  extension  of  the  production 
period  as  interest.  The  figures  may  change  as  they  will,  but  the  typical  relation 
holds,  that  the  interest  of  that  unit  of  capital  required  for  a definite  extension 
of  the  production  period  lies  between  the  mrplus  return  of  the  last  permis- 
sible and  the  fiist  non-permissible  extension. 

^ See  above,  p.  217.  ® See  above,  p.  221. 

■*  Bcr  isolirte  Stoat,  second  edition;  part  ii.  div.  i.  p.  100.  It  is  very 
notable  that  Thiinen,  without  knowing  the  law  of  marginal  utility,  without  any 
general  price  theory  based  on  that  law,  and,  finally,  even  without  any  clear 
insight  into  the  origin  of  interest,  was  able  to  solve  the  special  problem  of  the 
rate  of  interest  with  almost  entire  correctness,  and  in  the  sense  of  those  general 
theories  of  which  he  had  perhaps  a dim  presentiment. 


CHAPTEE  III 


THE  RATE  IN  MARKET  TRANSACTIONS (continued) 

But  our  task  is  not  yet  finished.  Following  the  same  lines  as 
we  took  in  developing  the  general  law  of  the  price  of  goods, ^ 
we  must  attempt  to  lay  down  the  concrete  determinants  which 
decide  the  degree  of  productiveness  of  the  last  extensioiL 

and  from  our  knowledge  of  these  we  must,  in  particular,  try 
to  get  an  explanation  of  the  variations  to  which  the  interest 
rate  is  subject  in  practical  life, — sometimes  rising,  sometimes 
falling,  but  with  a constant  tendency  in  the  latter  direction, 
over  the  whole  field  of  economical  development  in  historical 
times.  This  analysis  too  will  give  us  a welcome  oppor- 
tunity of  verifying  our  abstract  theory  bv  experience.  If  we 
find  that  our  theory,  starting  with  certain  assumed  conditions 
of  fact,  leads  us,  of  internal  necessity,  to  expect  just  that 
movement  of  interest  which,  in  the  experience  of  practical  life 
and  history,  we  see  actually  and  always  taking  place  when 
these  conditions  are  realised,  we  shall  be  justified  in  taking  it 
as  a strong  guarantee  that  our  theory,  although  it  uses  such 
abstract  machinery  in  the  stating,  is  no  vain  imagining,  but  a 
theory  obtained  from  the  study  of  practical  life.  • Moreover 
in  what  follows  I shall  be  in  much  less  marked  opposition  to 
old  doctrines  than  I have  been  in  the  foregoing  chapters.  For 
certam  connections  between  the  rate  of  interest  on  the  one 

Ridp.  and  definite  facts  on  the  other,  are  so  distinctly  and 
imquestionablv  given  bv  experience.  That  it  was  impossible  for 
the  adherents  of  any  interest  theory,  however  erroneous,  to 
overlook  them ; and,  however  different  the  theoretical  points 
from  which  they  may  have  started,  they  find  themselves  at 
^ See  above,  p.  218. 


396 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vii 


one  in  recognising  these.^  All  the  same  I venture  to  hope 
that  what  follows  will  give  more  accuracy  and  definiteness,  as 
well  as  a new  and  more  adequate  explanation,  to  many  a pro- 
position long  accredited  by  experience. 

Following  the  line  of  inquiry  already  pursued,  T shall  try 
to^mvestigate  the  concrete  determinants  of  the  rate  of  interest, 
and  the  manner  of  their  working,  in  such  a way  that  we  can 
s^^ccessively  vary  the  individual  assumptions  in  our  illustrative 
scheme,  and  then  see  what  result  the  variation  gives  us  as 
legards  the  formation  of  the  interest  rate.  Lot  us  look  fir.st. 
then,  at  the  influence  of  the  amount  of  the  national  .subsistence 
fund^ 

Assume  that,  other  circumstances  remaining  unchanged, 
the  available  subsistence  fund  amounts,  not  to  £1500,000,000 
but  to  £2400.000.000.  The  repetition  of  the  same  calcula- 
tion as  made  above  leads  us  to  the  conclusion  that  the 
equilibrium  of  the  market  cannot  now  be  attained  otherwise 
than .,by  an  eight  years’  production  period,  a £60  rate  of  wages. 
and  a corresponding  interest  rate  of  3~54°/.  We  may  check 
this  result  from  Table  II.  on  p.  389,  which  is  calculated 
on  the  £60  rate  of  wage.  It  shows  that,  where  the  rate 
of  wages  is  £60 — the  rate  of  productivity  being  given — 
the  undertaker  finds  an  eight  years’  production  period  the 
most  profitable;  that  4' 16  labourers  may  be  employed  by 
£1000  of  capital,  and  therefore,  10,000,000  of  labourers 
by  £2400,000,000  ; and,  finally,  that  this  (relatively)  most 
profitable  method  of  production  yields  3‘54^  interest  on 
the  undertaker’s  capital. 

As  compared  with  the  earlier  ones  this  rate  shows  a 

^ As.  e.q.^  in  the  familiar  proposition  that  an  increase  of  the,  national  papUa] 
tends  to  reduns  the  interest  rate.  In  tlie  points  here  raised,  I am  in  very  thorough 
agreement  with  Walras,  who,  like  Thiinen,  starts  from  a theory  of  interest 
which,  in  my  opinion,  is  essentially  wrong,  and  yet  is  able  to  arrive  at  many 
details  correctly  and  with  fine  scientific  feeling.  The  coming  second  edition  of  his 
Elements  d' hconomie  Politique  Pure,  the  proof  sheets  of  which,  by  the  kindness 
of  the  author,  I was  permitted  to  see,  contains  many  forcible  and  noteworthy 
passages  on  this  subject.  I can  only  regret  that  they  are  expressed  in  the 
troublesome  and  difficult  language  of  mathematics.  The  conception  of  political 
economy  as  pre-eminently  a mathematical  science  is  one  on  which,  notwith- 
standing what  the  distinguished  economist  has  recently  said  (p.  191  in  new 
edition),  I fear  we  shall  never  be  able_to  agree,. 


CHAP  III  SUBSISTENCE  INCREASING,  AGIO  FALLS 


397 


considerable  decline,  the  reason  of  which  is  very  easily  ex- 
plained. 'When  the  subsistence  fund  is  increased  men  can- 
only  keep  it  fully  employed  by  entering  on  further  exten- 
sions of  the  production  period,  which  extensions  are  acconi- 
]ianied  by  steadily  decreasing  surplus  returns.  Indeed  the 
surplus  return  of  the  last  extension  of  production  economic- 
ally possible  (from  seven  to  eight  years)  is  only  30  s.,  and  the 
surplus  return  of  the  first  non-permissible  extension  (from 
eight  to  nine  years)  is  only  20  s.  And  since  the  rise  of  the 
year’s  wage  from  £50  to  £60  requires,  for  the  one  year’s 
extension,  not  a capital  of  £25,  but  a capital  of  £30  per  man, 
the  marginal  limits  for  the  interest  rate  are  3 Os.  on  £30. 
(i.e.  5'^)  as  upper  limit,  and  20s.  on  £30  (f.e.  3-^'%)  as^ower 
As  a fact  the  agio  of  3'54^,  which  we  found  mnpiric- 
ally,  falls  between  these  determining  marginal  limits.^ 


TABLE  IV. 
Wage  £42. 


Production 
Period  in 
years. 

Annual 

Product. 

Annual  profit 
per 

labourer. 

Number 

of 

employed. 

Total  profit 
on  the 
£1000. 

1 

£35 

0 

— £7 

0 

47-62 

Loss 

2 

45 

0 

3 

0 

23-81 

£71-43 

3 

53 

0 

11 

0 

15-87 

174-57 

4 

58 

0 

16 

0 

11-905 

190-48 

5 

62 

0 

20 

0 

9-524 

190-48 

6 

65 

0 

23 

0 

7-93 

182-39 

7 

67 

0 

25 

0 

6-8 

170 

8 

68 

10 

26 

10 

5-95 

157-675 

9 

69 

10 

27 

10 

5-29 

145-475 

10 

70 

0 

28 

0 

4-76 

133-28 

Assume,  conversely,  that  the  available  subsistence  fund 
amounts  only  to  £1000.000.0Q0.  the  equilihriuni,  as  will  be 
seen  from  Table  IV.,  is  attained  at  a rate  of  wage  of  £42.  and 

^ In  this  case  it  falls  considerably  nearer  the  under  limit  on  account  of  the 
relative  abundance  of  the  capital,  which  would  be  almost  sufficient  for  general 
adoption  of  a nine  years’  production  period. 


398 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vn 


ail  agio  of  19 '04 8%.  This  is  accompanied  by  some  interesting 
circumstances  which  will  repay  a moment’s  attention,  as  they 
may  be  often  enough  realised  in  practical  life,  although  not 
seen  there  in  their  full  abstract  purity.  At  a prevailing  wage 
of  £42,  as  it  happens,  two  different  production  neriods  of  four. 
and  five  years  respectively  are  equally  profitable,  and  pay 
19‘048%  interest  on  the  capital  invested  in  them.  The  result 
of  this  is  that  neither  of  them  economically  shuts  out  the 
other;  both  may  be  adopted  simultaneously : indeed,  not  only 
may,  but  must,  to  kcejx-tlifi.  equilibrium.  If  the  four  years’ 
period  alone  were  adopted,  only  £840,000,000  of  capital  would 
find . employment  at  a wage  of  £42.^  If,  again,  the  five  years’ 
period  were  exclusively  adopted,  the  existing  capital  would 
employ  only  9,524,000  labourers;*  and  in  either  case  the 
unemployed  elements  would,  as  we  know,  disturb  the  equili- 
brium by  overbidding  and  underbidding.  The  equilibrium 
can  only  be  found  if  the  two  equally  profitable  methods  of 
production  are  engaged  in  simultaneously,  when  7,619,000 
labourers  will  be  employed  by  a capital  of  £800,000,000  in 
five  years’  production  and  2,381,000  labourers  by  a capital  of 
£200,000,000  in  four  years’  production. 

And,  in  virtue  of  this  peculiarity,  the  latitude  allowed  in 
fixing  the  agio  by  the  valuations  of  the  marginal  pair  will  be 
much  more  sharply  limited  in  this  than  in  the  former  examples. 
The  last  economically  permissible  extension  of  production  is 
from  four  to  five  years,  which  brings  in  a surplus  return  of  £4, 
that  being  a surplus  on  £21,  half  the  year’s  wage.  But,  as  it 
happens,  the  first  excluded  extension  of  production  is  also  that 
from  four  to  five  years,  inasmuch  as — as  shown  above — the 
existing  capital  allows  only  a portion  of  the  producers  to  take 
the  five  years’  production  period.  Consequently  the  surplus 
return  of  the  first  excluded  process — that  which  forms  the 
lower  limit  of  the  interest — is  also  fixed  at  £4.  The  upper 

^ That  is  to  say,  with  £1000  capital,  as  the  table  shows,  11  ’905  labourers  could 
be  employed  in  four  years’  production.  To  employ  all  the  existing  ten  million 
labourers,  therefore,  a capital  is  required  which  follows  this  proportion  : 

1000  : a;=ll'905  ; 10,000,000. 

The  solution  of  this  proportion  gives  : 

a:=:  10,000,000,000  : 11-905  = 840,000,000. 

^ With  £1000  capital  9-524  labourers  are  employed  in  five  years’  production  ; 
with  1000  millioihs  of  capital,  therefore,  9-524  millions  of  labourers. 


CHAP.  HI  SUBSISTENCE  DECREASING,  AGIO  RISES 


399 


and  lower  limit,  therefore,  coincide.,  and  the  interest  must  be 
determined  strictly  at  the  rate  of  £4  on  £21  ; that  is,  at 
19'048%,  just  as  actually  shown  in  our  former  scheme.^ 

Now  the  agio  here  is  considerably  higher  than  in  the 
former  cases.  And  our  theory  again  explains  it  quite  simply. 

I I may  call  attention  to  the  fact  that  now  we  arrive  at  the  figure  19 ‘048  by 

a quite  different  waj,  by  quite  different  lines  of  thouglit,  and  by  quite  different 

calculations,  than  in  the  above  table.  There  we  sought  and  found  empirically 
the  figures  of  wage  and  interest  at  which,  under  the  given  assumptions,  the  equili- 
brium of  Supply  and  Demand  may  be  established.  Now,  applying  the  law  of  the 
marginal  pair  to  the  concrete  case,  we  have  deduced  that  the  interest  must  lie 
between  the  surplus  returns  of  the  last  extension  of  production  still  permissible, 
and  the  first  excluded,  and  arrived  thereby  exactly  at  tbe  same  figure  19 '048. 
In  the  former  case  we  get  our  figures  immediately  by  multiplication  of  the  number 
of  employed  by  the  gain  made  per  labourer  (11 '905x16  and  9'524x20).  Here 
we  get  the  same  figure  by  dividing  the  dependent  last  surplus  product  by  half  the 
wage  (4  ; 21).  T may,  therefore,  take  this  agreement  as  a proof  that  our  deductive 
reasoning  correctly  expressed  the  resnlts  empirically  established. — Here  also  it 
may  be  the  most  suitable  place  to  point  out  the  error  into  which  Jevons  fell  as 
regards  this  question.  Jevons  recognises  perfectly  correctly  that  the  “last 
surplus  return  ” decides  the  interest  rate  ; but,  owing  to  an  oversight  in 
principle,  he  makes  the  mistake  of  fixing  on  that  other  amount  to  which  this 
surplus  return  must  be  put  in  relation,  and  deduces  the  rate  of  interest,  not  from 
the  relation  of  the  last  surplus  return  to  the  sum  of  subsistence  which  allows  the 
l^t  extension  of  production,  but  from  the  quite  different  relation  in  which  that 
surplus  return  stands  to  the  value  of  the  whole  product  which  might  have  been 
obtained  without  the  last  extension  of  production.  ‘ ‘ The  interest  of  capital  is 
the  rate  nf-increase  of  the  produce  divided  by  the  whole  produce  ” {Pol.  Econ.  second 
editiOri,  p.  267).  The  seriousness  of  this  oversight  will  be  best  seen  from  a con- 
crete example,  which,  for  the  sake  of  easier  comprehension,  I shall  take  from  the 
case  of  isolated  exchange  spoken  of  above  (p.  378).  Remembering  what  was  then 
said,  let  us  suppose  the  case  of  an  undertaker  whose  means  would  allow  him  to 
carry  through  an  eight  years’  producticfti  period  -with  a yearly  return  of  £68  : 10s., 
and  who,  by  a loan  of  £30,  which  would  guarantee  him  subsistence  for  a ninth 
year,  is  put  in  a position  to  go  on  to  a nine  years’  production  period  with  a return 
of  £69  : 10s.,  or  a surplus  return  of  20a.  According  to  Jevons  this  should  show 
an  interest  rate  of  £1  on  £68  ; 10s.,  or  1'46%.  But  evidently  there  is  no  ground 
whatever  why  the  suitor  for  the  loan  should  be  ready  to  offer  £1  per  year  and 
no  more  as  interest  for  a sum  of  £68  ; 10s.  It  is  not  the  amount  of  £68  : 10s., 
but  that  of  £30,  whose  acquisition  makes  the  extension  of  production  possible,  calls 
forth  the  surplus  return  of  £1,  and,  consequently,  may  be  paid,  in  the  most  extreme 
case,  by  £1,  but,  on  the  assumption  noted  on  p.  378,  note  1,  by  as  much  as  £2 
per  year.  As  a fact,  then,  in  the  case  of  this  illustration,  it  is  not,  as  Jevons 
assumed,  an  interest  of  £1  on  £68  : 10s.,  or  1'46%,  that  is  economically  possible,- 
but  an  interest  of  £1  on  £30.  or  3^%.  indeed,  on  the  above  assumption,  a rate 
of  £1  on  £15,  or  6|%.  A certain  very  modest  kernel  of  truth  may  be  found, 
all  the  same,  in  Jevons’s  error  ; but  to  point  it  out  I should  require  to  go  still 
further  afield  into  discussions  in  which  I could  not  assume  that  the  majority  of 
my  readers  would  find  sufficient  interest. 


400 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vii 


The  reason  is  that  the  diminished  subsistence  fund  allows  only 
of  comparatively  short  processes  on  the  average,  and  consequently 
the  “ last  extension  of  production  ” — that  which  decides  the 
interest  rate — falls  in  a sphere  where  any  extension  of  the  pro- 
duction periods  is 

So  much  for  the  effect  of  an  alteration  in  the  amount  of 
the  subsistence  fund : we  have  still  to  follow  the  p.ffftct  of  a.u 
alteration  in  number  of  workers.  Any  detailed  calculation  here, 
however,  should  not  be  necessary.  It  does  not  require  much 
consideration  to  see  that^  change  in  the  number  of  labour- 
ers  must  exert  its  influence  on  the  rate  of  interest  in  exactly 

the  opposite  direction.  Whether,  for  example,  the  number 
of  labourers  remains  steady  at  10,000,000,  and  the  subsistence" 
ftind  contracts  from  £1500,000,000  to  £1000,000,000;  or 
whether  the  subsistence  fund  remains  at  £1500,000,000  and 
the  labourers  increase  from  10,000,000  to  1500,000,00^  ; — in 
either  case  the  subsistence  fund  is  just  sufficient  to  employ  the 
existing  labourers  partly  in  four,  partly  in  five  years’  periods, 
while  the  “ last  ” and  decisive  surplus  return  is  £4  on  £21,  and 
the  resulting  rate  19 ’04 8^.  And  it  is  as  clear  that,  if  subsist- 
ence and  labourers  vary  simultaneously  in  the  same  direction 
— say  that  both  increase — the  variations  will  weaken  thp  pffi  - 
ciency  of  both,  and  the  final  movement  of  the  rate  will  follow 
that  direction  taken  by  the  stronger  of  the  varying  factors  ; and 
that,  on  the  other  hand,  if  both  factors  vary  not  only  in  the 
same  direction  but  also  in  the  same  ratio,  the  rate  will  remain 
unchanged.  Suppose,  for  instance,  that  the  number  of  workers 
and  the  amount  of  the  subsistence  fund  both  double,  it  is 
evident  that  the  doubled  fund  will  be  sufficient  to  provide  for 
the  doubled  numbers  over  the  same  production  periods  as  before, 
and  that  the  “ last  ” and  decisive  surplus,  and  with  it  the 
interest  rate,  wiU  remain  unchanged.  If,  again,  the  fund  were 
to  double  while  the  numbers  increased  only  by  a half,  it  is 
obvious  that,  on  the  average,  a longer  production  period  could 
be  adopted  than  formerly ; in  which  case  the  decisive  “ last  ” 
surplus  return  would  be  reduced  to  a lower  point  on  the 
descending  scale  of  surpluses,  and  the  interest  i-ate  would 
also  fall. 

rinally,  we  might  inquire,  on  the  same  lines,  what  will  be 


CHAP.  Ill 


ITS  THREE  FACTORS 


401 


ihe  effect  of  an  alteration  in  a third  factor,  the  state  of  pro- 
ducti\4t\%  assuming  that  subsistence  fund  and  number  of 
labourers  remain  constant.  Here  also  we  may  spare  ourselves 
any  detailed  tabular  statement.  It  does  not  require  any  exact 
calculation  to  prove  that  if,  other  circumstances  remaining  un 
changed,  the  scale  of  surplus  returns  constantly  shows  higher 
tigures,  the  surplus  return  yielded  by  the  last  extension  of 
production  that  is  economically  permissible — that  which  decides 
the  interest  rate — must  be  higher,  and  vice  versd.  Say  that 
subsistence  fund  and  number  of  labourers  stand  in  such  a rela- 
tion as  to  permit  of  an  average  five  years’  production  period, 
the  interest  will  be  higher  if  the  extension  of  the  production 
period  from  four  to  five  years  is  attended  by  a surplus  return 
of  £6  as  against  £4,  or  of  £4  against  £1. 

We  have,  then,  over  the  sphere  of  our  investigations  so 
far,  to  record  three  elements  or  factors  which  act  as  decisive 
determinants  of  the  rate  of  interest : the  Amount  of  the 
national  subsistence  fund,  the  Humber  of  workers  provided  for 
^v  it.  and  the  Degree  of  productivity  in  extending  production 

pgriodSv  And  the  way  in  which  these  three  factors  affect 
the  rate  may  be  put  as  follows : — 

In  a community  interest  will  be  high  in  proportion  as  the 
national  subsistence  fund  is  low,  as  the  number  of  labourers 
employed  by  the  same  is  great,  and  as  the  surplus  returns  con- 
nected with  any  further  extension  of  the  production  period 
continue  high.  ConverselY.  interest  will  be  low  the  greater 
the  subsistence  fund,  the  fewer  the  1a,bourers.  and  the  quicker 
the  fall  of  the  surplus  returns. 

This  is  the  way  in  which  the  interest  rate  should  be 
formed,  and  the  way  in  which  it  should  alter,  if  our  theory 
is  correct.  How  is  it  in  actual  life  ? — Exactly  -ns  nnr  forirmla 
predicts,  and  thus  experience  gives  that  formula  the  most  com- 
plete verification.  For,  first,  it  is  one  of  the  best  accredited  and 
recognised  facts  of  economic  history  that  the  increase  of  the 
subsistence  fund,  or,  to  use  an  expression  not  quite  so  accurate 
but  yet  roughly  significant,  the  increase  of  the  community’s 
capital,  has  a tendency  to  depress  the  rate  of  interest. 

Second,  it  is  no  less  familiar  and  self-evident  that  here  we 
do  not  speak  of  the  absolute  amount  of  the  national  capital, 
but  of  the  relation  between  that  capital  and  the  numbeis 

2 D 


402 


THE  RATE  IN  MARKET  TRANSACTIONS  book  vii 


of  the  population  : in  othei  words,  we  mea,n  that  an  increase 
of  popiilation,  without  a simnltaneons  inorpasR  of  capital,  has  a 
tendency  to  raise  the  interest  rate.  And,  tliirdly,  it  is  also  an 
i^nowTedged  empirical  fact  that  the  discovery  of  new  and  more 
productive  methods  of  production,  outlets,  business  opportuni- 
ties, etc.,  which  conduce  to  check  the  fall  of  surplus  returns, 
tend  to  raise  the  rate  of  interest,  while  the  closing  of  former 
opportunities  of  production  or  sale,  or  other  occurrences  which 
end  in  a reduction  of  the  previous  degree  of  productiveness, 
tend  to  lower  the  interest  rate.  We  find,  therefore,  that  all 
those  factors  to  which,  on  the  lines  of  our  former  inquiry,  we 
were  forced  to  ascribe  a decisive  influence  on  the  interest  rate, 
do,  as  a fact,  possess  and  exert  that  influence. 

And  now  it  is  time  to  give,  one  by  one,  the  features  and 
forms  of  actual  life  to  our  abstract  scheme. 


CHAPTER  IV 


THE  MAKKET  FOR  CAPITAL  IN  ITS  FULL  DEtELOPMENT 


Up  till  this  uoint  wr  ha,ve  assumed  that  the  annual  product  of 

each  worPp.r,  n.Tirl  alsn  the  anmial  wage,  is  the  same  in  aU 
branches  of  employmeiifc.  Of  course,  in  actual  life  this  is  not 
the  case.  But  that  does  not  in  the  least  disturb  the  normal 
connections  and  relations  we  have  laid  down,  otherwise  than 
by  acting  as  if  there  were  a somewhat  different  number  of  un- 
skilled labourers  with  ordinary  wages  and  ordinary  productivity. 
For  even  if  the  absolute  amount  of  the  return  to  labour  on  the 
one  hand,  and  that  of  the  wage  of  labour  on  the  other,  be  ever 
so  various  in  the  various  branches  of  employment,  still  the  ratio 
between  these  two  ammints  will,  in  virtue,  of  the  famihar 
of  ^qua.bsa.tinn  of  nrofits.  remain  the  same  all  over,  and  this 
is  the  essential  matter  in  the  question  of  Interest.  If,  for 
instance,  in  one  branch  of  production,  the  wage  of  unskilled 
labour  be  £50,  and  the  product  of  a year’s  labour  £65,  in 
another  branch,  carried  on  mostly  by  skilled  labour,  the  worker’s 
annual  product  may,  perhaps,  be  double,  say  £130.  But  then 
the  wage  of  such  a worker  will  also  rise  to  double,  say  to  £100. 
For,  if  it  did  not  rise,  the  undertakers  in  this  branch  of  busi- 
ness would  obtain  an  abnormal  surplus ; this  would  attract 
stronger  competition ; and  competition  would  either  raise  wages 
by  creating  an  active  demand  for  workers,  or  press  down  the 
price  of  products  by  increasing  supply.  But  if  the  wage  of 
the  skdled  labourer  were  to  rise  higher  than  £100,  the  under- 
takers in  question  would  agaui  obtain  too  small  a profit,  and 
the  consequent  limitation  of  that  branch  of  production  would 
undoubtedly  either  press  down  the  wage  of  workers,  who  would 
now  have  become  partly  superfluous,  or  raise  the  price  of 


404 


THE  MARKET  FOR  CAPITAL 


BOOK  VII 


the  restricted  product,  till  such  time  as  wage  and  product,  here 
as  everywhere,  stand  in  the  ratio  of  £50  to  £65,  or  £100  to 
£130.  But  if  this  ratio  lipt-yvppn  wagos  and  product  holds,  all 
the  ratios  relating  to  the  formation  of  interest  are  exactly  as 
they  have  been  assumed  to  be  in  our  earlier  tabular  statement, 
with  the  single  qualification  already  mentioned,  that  the  exist- 
ence of  better  paid  skilled  labour  has  exactly  the  same  effect 
as  a somewhat  greater  number  of  normally  paid  unskilled 
laliourers.  For,  obviously,  it  is  all  the  same  as  regards  the 
resultant  arrived  at  in  the  subsistence  market,  whether  two 
labourers  produce  £65  each,  and  claim  £50  each  of  subsistence, 
or  one  labourer  produces  £130  and  claims  £100. 

Further,  we  have  assumed  up  tiU  now  that,  in  all  branches 
of  business,  the  increment  of  annual  return  that  accompanies 
the  increasing  extension  of  the  production  period,  moves  in  the 
same  rate  of  progression.  This  also  is  not  the  case  in  real  life. 
On  the  contrary,  each  branch  of  production,  in  virtue  of  its 

technical  circumstances,  has  a different  and— often,  indeed,  a. 
very  different  scale,  of  productivity.  It  is,  for  instance,  quite 
possible  that  three  different  branches  of  production — call  them 
A,  B,  and  C — which  were  each  turning  out  in  a one  year’s 
process  an  annual  product  of  £50,  might  show  an  exceedingly 
divergent  return  (or  surplus  return)  if  the  process  were 
extended  for  two  to  five  years  more.  We  might  have  something 
like  the  following  : — 


Production 

Period. 

A 

B 

C 

r 

Return. 

Surplus. 

Eetum. 

Surplus. 

r 

Return. 

Surplus. 

1 year 

£50 

0 

£50 

0 

_ 

£50 

0 

2 years 

51 

0 

£1  0 

52 

0 

£2  0 

60 

0 £10 

0 

3 „ 

51 

10 

0 10 

53 

0 

1 0 

65 

0 

5 

0 

4 „ 

51 

16 

0 6 

53 

10 

0 10 

67 

10 

2 

10 

5 „ 

52 

0 

0 4 

53 

16 

0 6 

69 

0 

1 

10 

Naturally  this  has  its  practical  consequences.  It  is  the 
producers’  interest  to  obtain  the  greatest  returns  or  surplus 
returns.  They  will,  therefore,  invest  the  available-.eaDitaI 
where  they  a.rft  tp.Tnptp.d  by  the  greatest  returns.  If  there  is 


CHAP.  IV 


ISOHYPSE  OF  SURPLUS  RETURNS 


405 


capital  over,  or  if  new  capital  is  added,  they  will  look  out  for 
the  next  best  pa}Tng  employments,  and  so  on,  in  such  a way 
that  they  will  only  take  a less  paying  employment  when  all 
the  more  paying  chances  have  been  utilised. 

Now  if,  as  we  have  hitherto  assumed,  the.  progression  of 
surplus  returns  obtainable  from  similar  extensions  of  produc- 
tion were  the  same  in  all  branches  of  employment,  then,  in 
all  branches  of  employment,  the  same  surplus  would  be  reached 
by  the  same  length  of  process,  and,  consequently,  an  equally 
long  production  period  would  prevail  simultaneously  over  all^^ 
employments.  As  capital  increased  it  would  press  on,  with 
one  united  front,  from  one  to  two,  from  two  to  three  years’ 
production,  and  so  on.  But,  as  we  have  said,  nwjpg  tn 
different  technical  circumstances  in  the  various  brandies  oh 

production,  we  actually  meet  the  same  surphi-q  rpt.nm  in  pm^ 
ductive  periods  of  different  lengths.  While,  then,  in  the 
investing  of  capital  we  pursue  an  isohypse — to  borrow  a 
geographical  term — of  surplus  returns,  we  must  diverge  from 
an  isohypse  of  extensions  of  production.  Production  in  its 
various  branches  must  be  ca.rried QjL_in  unequally  long 

processes  ; and,  indeed,  in  those  branches  where  the  surplus 
return  sinks  rapidly,  it  must  be  carried  on  in  shorter  periods. 

The  above  scheme  will  illustrate  this.  First  of  all  pro- 
duction is  carried  on,  in  all  three  branches,  in  a one  year’s 
process  with  a return  of  £50  per  labour- year.  If  the  sub- 
sistence fund  increases  so  much  that  at  least  a partial  extension 
over  the  one  year’s  period  is  possible,  people  will  pass  first  to 
a two  years’  process  in  branch  C.  which  bears  a .surplus  returp 
of  £10  for  a half-year’s  payment.^  Then  the  production  period 
will  be  extended  in  the  same  branch  C to  three  years  (with  a 
surplus  return  of  £5),  and  to  four  years  (with  a surplus  of 
£2 : 10s.),  while  the  other  two  branches  of  production  are 
all  the  time  persisting  in  the  comparatively  unremunerative 
one  year’s  process.  Only  where  the  subsistence  fund  increases 
still  further  will  they  pass  in  branch  B to  two  years’  produc- 
tion (with  a surplus  return  of  £2).  But  in  .branch  A they 
will  not  be  able  to  extend  the  period  of  their  production 
(which  only  gives  a surplus  return  of  £1),  until  all  opportunities 
of  production  have  been  utilised  up  to  the  isohypse  of  £1. 

See  above,  p.  392. 


406 


THE  MARKET  FOR  CAPITAL 


BOOK  VIl 


This  will  only  be  the  case  when  in  branch  C the  production 
period  has  been  extended  to  five  years,  and  in  branch  B to 
three  years.  Production,  then,  will  and  must  be  carried  on 
simultaneously  in  the  three  different  blanches  in  two,  three, 

and  five  years’  periods- — a conclusion  which  we  see  verified  in 
economic  practice  in  the  familiar  fact  that  different  products 
are  produced  with  very  different  degrees  of  capitalism.  Fond, 
for  instance,  is  a much  less  capitalistic  product  than  metallic 
goods,  or  clothing  stuffs,  or  manufacturing  products  generally.^ 

How,  then,  is  our  law  of  the  rate  of  interest  affected  by 
this  complexity  of  actual  circumstances  ? — It  is  not  disturbed 
in  the  least.  Por  all  the  essential  circumstances  on  which  it 
rests  remain  unchanged.  It  is  still  the  oase  that  the  existent 
capital  is  employed  in  gradually  extending  processes  till  it  is 
fully  occupied.  It  is  still  the  case  that  there  is  a certain  level 
of  these  extensions,  yielding  a certain  surplus  return,  which 
is  the  last  economically  permissible,  and  a succeeding  level 
yielding  a somewhat  less  surplus  return  which  is  economically 
not  permissible.  And,  finally,  it  is  still  the  case  that  the 
surplus  returns  of  these  “ marginal  employments  ” also  form 
the  marginal  limits  of  the  interest  rate^  The  single  difference 
— and  that  not  an  essential  one — is  that  the  isohypse  of  the 
surplus  returns,  and  with  it  the  line  of  the  last  permissible 
extensions  of  production,  is  not  a straight  line,  but  nms  in 
an  undulatory  or  zigzag  fashion  through  the  different  branches 
of  production,  according  as  the  same  surplus  return  is  reached 
by  them  in  longer  or  shorter  processes.  But  this  modification 
gives  our  law  a still  sharper  power  of  definition.  For  as,  in 
consequence  of  the  complexity  of  actual  life,  the  scale  of  pro- 
ductivity is  much  more  finely  graduated  than  was  our  simple 
typical  scheme,  the  two  marginal  limits,  as  a rule,  stand  much 
nearer  each  other,  and  consequently  narrow  the  zone  within 
which  price  is  determined  very  much  more  closely  than  is 
shown  in  our  abstract  illustration.^ 

To  proceed.  Hitherto  we  have  assumed  that  the  demand 
for  present  goods  comes  simplv  from  the  wage-earners,  (either 
directly  or  through  the  mediation  of  undertakers).  But  this, 

^ See  what  was  said  above  on  p.  334  : the  two  passages  mutually  supplement 
each  other.  ^ See  above,  p.  394. 


CHAP.  IV 


DEMAND  FOR  CONSUMPTION 


407 


again,  in  actual  Life  is  not  correct : there  are  a few  other 
competitors  in  the  market. 


There  are,  first,  the  suitors  for  rnn sumption  credit.  Their 
demand  is  graduated  and  stratified  according  to  the  urgency 
of  their  need  for  present  goods.^  One  class  will  be  in  such 
pressing  need  that,  in  the  worst  case,  they  will  be  glad  to 
offer  an  agio  of  100^  : another  class  will  only  go  the  length 
of  80%  : a third  will  offer  60% ; others  50%,  and  so  on 
down  the  scale,  perhaps,  to  2%.  Now  these  suitors  join 
their  claims  to  the  demand  which  comes  from  the  wage- 

earners,  and  each  class  or  layer  of  them  is  satisfied  con- 
currently with  that  layer  of  productive  employments  yielding 
a surplus  return  that  represents  the  same  percentage.  If, 
for  instance,  the  investing  of  capital  reaches  the  isohypse 
of  a surplus  of  £4  on  £21,  all  those  suitors  for  loans  wiQ 
be  satisfied  simultaneously  who,  in  the  worst  circumstances, 
are  able  to  offer  19 '048%  or  more:  if  it  reaches  the  isohypse 
of  a surplus  of  £2  : 10s.  on  £25  all  suitors  will  be  served  who 
are  willing  to  offer  at  least  10%,  and  so  on. 

It  would  be  quite  erroneous  to  understand  this  as  meaning 
that  the  rate  of  loan  interest  is  determined  simply  bv  the  rate 

of  interest  obtained  in  production.  It  contributes  just  as 

much  to  determine  the  latter,  as  it  is  determined  by  it.  Both 
classes  of  demand  work  in  entire  co-ordination.  The  fact  that 
there  is  a certain  class  of  suitors  for  consumption  loans,  and 
that  this  class  takes  a portion  of  the  existent  means  of  sub- 
sistence out  of  the  market,  involves  that  there  are  fewer  means 
at  the  disposal  of  productive  investors ; investment  must  caU 
a halt  at  a higher  isohypse  of  surplus  returns ; and  this  again 
involves  a higher  rate  of  interest  in  the  sphere  of  production. 
Conversely  the  presence  of  the  productive  demand  results  in  a 
considerable  portion  of  the  means  of  subsistence  being  claimed 
for  productive  purposes,  and  this  again  has  the  result  that  the 
wants  of  consumption  credit  are  not  satisfied  at  such  low 
levels  as  would  otherwise  have  been  the  case.  In  the  present 
day,  of  course,  the  productive  demand  is  so  much  the  more. 
important  of  the  two  that  one  is  apt  to  suppose  that  it  alone^ 

niles  the  rate  of  interest.  But  this  false  impression  is  now 
and  then  sensibly  corrected  by  experience  when  some  great 


^ See  above,  p.  376. 


408 


THE  MARKET  FOR  CAPITAL 


BOOK  VII 


X 


/OtX 


state-loan  for  consumption  purposes — say  for  a war — makes 
, the  general  interest  rate  fly  ufi.  even  when  the  demand 

for  consumption  credit  is  quite  insignificant,  it  does  not  fail  to 
exert  some  influence  on  the  rate ; it  may  always  be  contended 
that,  if  it  were  to  disappear,  the  interest  rate  would  be  at  least 
a fraction  lower  than  it  is  now. 

^ Another  competitor  in  the  market  for  capital  is  the  Land- 

owner.  If  owners  work  their  own  lands,  and  are  content  to 
maintain  themselves  by  the  fruits  of  their  labour  (whereby 
they  lay  past  their  rent  as  saving),  they  are  no  burden  on  the 
subsistence  fund  of  the  community.  If,  however,  they  live 
wholly  or  partiaUy  on  their  rents,  their  subsistence  also  must 

be  advanced  out  of  the  community’s  fund,  for  a length  of  time 
proportional  to  the  production  periods  in  which  their  land  is 
laid  down.  Suppose,  for  instance,  that  the  wealthy  cotton 
planter  hves  in  idleness  on  his  rents,  and  that  the  total  pro- 
duction process  of  textiles,  including  the  various  stages  of 
spinning,  weaving,  etc.,  down  to  the  manufacture  of  the  finished 
cotton  stuffs,  takes  five  years,  the  maintenance  of  the  planter. 
just  as  much  as  that  of  his  field-worker,  mnat  bp  Advanced 
out  of  the  subsistence  fund  over  five  vears^  The  advance 
win  then,  of  course,  be  refunded  out  of  that  quota  of  pro- 
duct which — according  to  the  law  of  complementary  goods — 
is  due  to  the  co-operation  of  the  uses  of  land ; but,  in  the 
meantime,  the  landowner  lives  at  the  expense  of  the  sub- 
sistence fund. 

"W  hat  kind  of  effect  has  this  on  the  rate  of  interest  ? — -Its, 
effect  is  entirely  similar  to  that  of  consumption  credit.  The 
competition  of  landowners  takes  a certain  amount  of  subsist- 
ence out  of  the  market ; it  thus  curtails  the  investment  of 
capital  in  production,  and  makes  it  call  a halt  at  a higher 
isohypse  of  surplus  returns;  and  this,  finally,  keeps  up  the 
rate  of  interest.  In  doing  so,  however,  the  claim  of  the  land- 
owner  on  subsistence  comes  under  a reflex  influence  from  the 
I height  of  the  interest  rate.  This,  of  course,  has  no  reference 
\ to  the  height  of  the  annual  rents — for  this  is  fixed  by  those 
circumstances  which  influence  the  economic  value  of  uses  of 
t land,  and  need  not  be  mentioned  here — but  to  the  numher  of 
[ annual  rents  for  which  advances  of  subsistence  are  demanded. 
That  is  to  say ; if  interest  is  high,  kngthy  peripd_s_.,pi_prDdjiQr 


CHAP.  IV 


LANDOWNERS  AND  CAPITALISTS 


409 


tion  are  not  prnfitahip.  the  uses  of  land  will  be  invested  in 
comparatively  short  processes ; and,  as  consequence,  the  a.cL 
vances  made  to  landowners  will  only  be  for  short  periods.  If, 

however,  the  interest  I'ate  is  low,  then,  concurrently  with  the 
increase  in  production  and  consumption  credit,  increases  the 
subsistence  advanced  to  the  landowners ; it  now  extends  over 
a greater  number  of  annual  rents  according  as  the  uses  of 
their  land  can  now  be  invested  in  much  longer  processes. 

There  is  one  other  competing  party  in  the  market,  the/^^ 
Capitalists  themselves.  So  far  as  they  live,  entirely  or  par- 
tially, on  their  interest,  their  maintenance  also  will  be  defrayed 
from  the  subsistence  fund,  and,  in  so  far  as  the  fund  available 
for  other  purposes  is  thereby  contracted,  will  the  interest  rate 
tend  to  rise.  There  is,  however,  one  important  difference 
between  the  claims  of  the  capitalist  on  subsistence,  and  those 
of  the  wage-earners,  the  suitors  for  loans,  and  the  landowners. 

The  claims  of  the  latter  are  the  cause  of  the  agio  on  present  ^ 

goods : the  claims  of  the  former  are  simply  its  effect.  If  the 
claims  on  subsistence  presented  by  the  wage-earners,  borrowers, 
and  landowners  did  not  by  themselves  alone  exceed  the  existent 
subsistence  fund,  there  would  be  no  agio  on  present  goods,  and, 
as  consequence,  the  capitahsts,  as  such,  could  make  no  valid 
claim  for  subsistence  on  the  funds  of  the  community : in_ 
default  of  an  income  from  intprpst  they  would  have  to  support 
themselves  by  work.  It  is  only  because  there  is  an  agio,  as 
effect  of  the  other  classes  of  demand,  that  the  capitalists  can 
claim  a quota  of  the  product  as  interest,  and  claim  it  indeed  in 
advance.  Eeflexly  of  course,  this  claim  of  the  capitahstSLin-,  ^ 
lluences  the  rate  of  interest.  It  is  exactly  as,  for  instance,  in 
electrical  induction.  The  chief  current  first  calls  out  the 
induction  current,  and  then  the  latter  reflexly  influences,  and 
indeed  strengthens,  the  chief  current.  Just  in  the  same  way 
does  the  demand  of  the  other  competing  parties  in  the  market, 
by_creating  an  agio,  first  call  out,  the  claims  of  the  capitalists, 
on  subsistence : but,  so  soon_as  the  agio  is  a fact,  it  diverts 
a portioEuof  the  subsistence  fund  into  the  income  of  the 
capitalists ; it  thus  contracts  the  disposable  remainder ; deter- 
mines the  “ saturation  point,”  in  the  remaining  branches,  at  a 

1 WMcli  can  be  quite  easily  calculated  from  our  tabular  e.xamples.  Sec,  too, 
the  close  connection  of  what  was  said  on  p.  382. 


y 


BOOK  Vll 


410  THE  MARKET  FOR  CAPITAL 

higher  marginal  utility ; a^i^so,  in  the  last  resort,  causes  a 
rise  of  the  agio. 

Suppose  we  try  now  to  unite  the  scattered  features  into 
one  picture.  In  its  collective  stock  of  wealth  every  people  pos- 
sesses a greater  or  less  fund  of  subsistence.  This  is  consumed 
definitively  by  uneconomic  persons  who  waste  their  parent 
wealth,^  and  by  the  suitors  for  consumption  credit : it  is 
consumed  as  an  advance  by  landowners,  capitalists,  and  wage- 
earners  during  the  social  pei’iod  of  production.^  The  greater 
the  subsistence  fund,  the  longer  can  the  social  period  of 
production  be  extended,  and  the  more  completely  can  the 
demands  for  consumption  ciedit  be  satisfied.  The  return  of 
the  last  extensions  of  production  still  possible,  and,  concurrently, 
the  valuation  of  the  last  suitors  who  obtain  loans,  determine 
the  height  of  the  agio  on  present  goods. 

. Consequently,  on  the  basis  of  our  completed  inquiries,  the 
following  factors  emerge  as  the  most  important  concrete 
circumstances  or  “ determinants  ” which  influence  the  rate  of 

interest. 

First  come  the  same  three  factors  which  from  our  inquiry 
into  the  circumstances  of  the  labour  market  in  its  most  abstract 
form  we  were  forced  to  recognise  as  decisive  : — 

1.  The  amount  of  the  National  Subsistence  Fund. 

2.  The  number  of  produceua  to  be  provided  for  out  of 
the  same. 

3.  The  position  of  the  scale  of  surplus  returns,  connected 
with  the  increasing  extensions  of  process. 

After  these  come : — < 

4.  The  extent  and  the  intensity  of  the  desire  for  -con- 
sumption loans. 

5.  The  existence  and  the  height  of  land  renp^  The  higher 

1 See  above,  p.  319. 

2 Members  of  the  community  not  here  mentioned,  as  women,  children, 
persons  who  occupy  themselves  with  the  performance  of  personal  services,  as 
artists,  officials,  domestics,  must  also,  of  course,  get  part  of  the  subsistence  fund. 
But  they  are  not  to  be  counted  separately,  for  the  reason  that  they,  are  not  a 
direct  charge  on  the  social  subsistence  fund,  but  on  the  portions  secured  by  the 

economical  classes  already  mentioned  in  the  text.  Yiolin-plavers.  e.Q..  receive  a 

fwrtion  of  the  subsistence  obtairfed  by  concert-goers  ; the  establishment  of  a 
rich  landowner  is  supported  and  paid  out  of  his  rent,  and  so  on. 


CHAP.  IV 


CONCRETE  FACTORS  OF  THE  RATE 


411 


that  rent  is,  the  more  persons  there  are  who  can  live  on  their 
rents  without  working,  and  the  higher  will  be  the  standard 
of  living  by  which  they  regulate  their  maintenance.  Natur- 
ally, if  the  amount  of  subsistence  which  they  take  as  advances 
out  of  the  social  subsistence  fund  goes  parallel  with  that 
standard  of  comfort,  there  wiU  be  the  less  for  other  pur- 
poses, and  interest  will  remain  at  a higher  level.  The 
existence  of  land  rent,  therefore,  tends  to  enhance  the  ra.te 

of  interest.^ 

6.  The  existence  of  a numerous  capitalist  class  living  on 
their  interest — for  reasons  which  apply  equally  to  landowners 
and  capitalists. 

7.  FinalLv : the  economical  habits  of  the  population  have 
a great  influence  directly  and  indirectly.  Indirectly,  inas- 
much as  national  thrift  gathers  together  a greater  stock  of 
wealth : directly,  inasmuch  as  thrifty  living  diminishes  the 
claims  on  subsistence,  whereby,  if  subsistence  remains  constant, 
the  population  is  maintained  for  a longer  period,  and  the 
investment  of  ca,pital  is  extended  till  there  is  a lower  isohypse 
of  surplus  returns.  If  a nation  is  thrifty,  neither  landowners 
nor  capitalists  will  consume  all  their  rents ; they  will  either 
work  as  undertakers,  and  live  simply  by  their  own  labour,  or 
at  least  they  will  save  a portion  of  their  income.  The  •portion 
saved  represents,  as  it  were,  a certain  amount  of  the  subsistence 

fund  allotted  but  not  taken  up.  and  the  amount  is  left  free 
for  another  employment,  particularly  for  a further  extension 
of  the  production  period.  The  same  is  true  of  savings  which 

1 I must  guard  myself  against  a misunderstanding  very  apt  to  occur.  What 
T mainhtiTi  is  fhat  the  position  of  land  rent  as  a form  of  incoTpi;'.— the  absorption 
of  a portion  of  the  national  product  by  landowners  who  live  without  working, — 
tends  to  raise  the  rate  of  interest  On  the  other  hand.  I do  not  say  that  thn. 

the  contrary,  the  well-known  law  of  Diminishing  Returns,  according  to  which 
(in  the  absence  of  technical  discoveries  or  improvements)  new  additions  of 
capital  and  labour  in  agriculture  lead  to  a decreasing  surplus  return,  while  it 
exerts  an  upward  influence  on  land  rent,  certainly  exerts  a depressing  influence  on 
interest  (see  point  3 in  the  text).  The  full  bearing  of  my  contention  is  best 
expressed  in  this  ; — that  in  event  of  the  taking  away  of  private  right  to  land,  or 
Tipavy  and  ^r.nfif|catorv  taxation  of  land  rent,  interest  in  that  community  would 

.stand  In-n-pr  tVian  it  would  otherwise.  The  causes  of  land  rent,  in  themselves, 
would  depress  interest,  but  land  rent,  as  one  of  the  shares  in  the  division,  through 
its  efiects  on  the  division,  makes  up  for  a portion  of  these  influences. 


412 


THE  MARKET  FOR  CAPITAL 


BOOK  VII 


the  labourers,  or  such  persons  as  are  in  possession  of  a secondary 
income,  are  able  to  make.^ 

If  we  pursue  this  line  of  thought  a little  further  we  shall 
repair  an  omission  in  our  former  analysis.  Hitherto  we  have 
considered  subsistence  fund  and  subsistence  claims  as  some- 

thing actually  existing  and  present:  we  must  now  consider 
them  in  the  act  of  becoming.  Hitherto  we  have  looked  at  the 
subsistence  fund  as  standing  over  against,  and  disputing  the 
claims  which  the  open  market  made  on  it : we  have  still  to 
consider  th^  nmcolpcg  b^i  never-ceasiTig  wa^d  on__wealth. 
in  p.a.ch  indibddual  ftconm-ny  bv  the  desire  of  enjoyment.  What 
follows  will  form  both  continuation  and  conclusion  of  another 
line  of  thought  on  the  subject  of  tbp  formation  of  capital 
begun  on  p.  124. 

' It  may,  perhaps,  have  been  noticed  that  the  often-mentioned  factor  of 
Insurance  or  Risk,  which  plays  so  great  a part  in  practical  life,  especially  in 
determining  the  rate  of  interest  on  loans,  is  missed  out  in  my  enumeration. 
This  factor,  however,  has  no  place  here.  For  the  surplus  return  which  this 
gives  the  capitalist,  if-to-alLAppearance  it  raises  the  rate  of  interest,  is  in  truth 
no  real  interest. — no  net  income  accruing  from  the  possession  of  capital, — but 
only  a replacement  for  a loss  of  parent  stock  which  shows  itself  as  unavoidable 
over  a great  average  of  cases. — Finally,  from  the  whole  course  of  my  research,  it 
will  be  self-evident  that  itjwas  not  my  intention  to  introduce  nvbanstivpiy  nil,  tfie 
secondary  determinants  of  the  rate  of  interest.  I have  contented  myself  inten- 
tionally with  enumerating  the  most  important  of  those  determinants  which 
come  into  view  as  typical  if  the  economical  interests  of  the  market  are  followed 
without  let  and  hindrance.  On  the  other  hand,  the  influence  of  motives  such 
as  generosity,  national  prejudice,  vanity,  etc.  (see  Conrad's  Jahrhilcher,  vol.  xiii. 
p.  486)  I have  purposely  left  out  of  account  here.  See  also  below. 


CHAPTEE  V 


THE  MARKET  FOR  CAPITAL  IN  ITS  FULL  DEVELOPMENT 
{continued) 

Every  man  has  the  power  of  disposal  over  a certain  amount 
of  goods,  small  or  great,  partly  deUvered  him  as  “ parent 
wealth  ” by  the  past,  partly  obtained  by  him  as  “ income  ” 
in  the  present,  and  these  two  together  form  his  " wealth  ” 
{Vermogen).  The  natural  destination  of  this  wealth  is  to 
satisfy  his  wants.  It  may  be  said  wealth  exists  for  wants. 
But  many  wants  compete  with  each  other  and  put  in  rival 
claims.  On  the  one  hand,  wants  of  different  kinds  compete 
at  the  same  point  of  time ; on  the  other  hand,  wants  of 
different  times — wants  of  the  present  and  wants  of  the  future 
— compete  with  each  other.  How  are  these  various  claims  to 
be  adjusted  ? 

In  a good  economical  system  they  will  be  adjusted  in 

accordance  with  the  principle  of  “ economical  conduct.”  which 
prescribes  that  the  goods  available  should  secure  the  highest 
possible  personal  utility.  And  since  even  the  richest  man’s 
wealth  is  not  sufficient  to  satisfy  aU  his  wants  and  wishes 
this  again  demands  that  he  make  a wise  selection  among  his 
wants  so  that  he  may  procure  satisfaction,  as  his  available 
means  will  allow,  to  the  most  important,  and  leave  the  unim- 
portant unsatisfied.  Applied  to  the  competition  of  different 
classes  of  wants,  this  leads  to  the  principle  of  harmonious 
satisfaction ; by  which  is  meant  that,  in  a.h  branr.hpg-nf  wgnt, 
satisfaction  reaches  down  to  the  same  level  of  importance,  so 
that,  over  the  whole  field,  the  unit  of  goods  procure.^  thp.  .gamp, 
marginal  utility.  For  if  in  one  department  of  want  a man  were 
to  break  off  the  satisfaction  he  gets  at  a high  level,  in  order  to 


414 


THE  MARKET  FOR  CAPITAL 


BOOK  VII 


seek  for  satisfaction  in  another  department  at  a lower  level,  it 
would  mean  that  he  deliberately  renounced  a greater  utility 
for  a less  one,  and  this  would  be  to  run  counter  to  economical 
principles.^ 

But  we  employ  the  very  same  principle  of  harmonious 

satisfaction,  and  for  the  same  reasons,  to  regulate  the  competiT 

tion  between  the  wants  of  various  times.  In  the  economical 
furtherance  of  our  life  we  reach  the  highest  possible  point, 
^ when  we  distribute  the  means  of  satisfaction,  which  we,  have 
at  our  disposal,  over  the  various  periods  of  time  in  such  a way 
that  the  last  unit  of  goods  procures  the  sa,mR  marginal  utility 
at  all  points  of  time.  For,  so  long  as  this  is  not  the  ease,  we 
shall,  obviously,  be  able  to  increase  the  amount  of  our  gain 
by  withdrawing  units  of  goods  from  those  times  in  which 
they  procure  a smaller  marginal  utility,  and  applying  them 
to  the  provision  of  those  times  in  which  they  are  fitted  to 
procure  a greater  marginal  utility.^ 

nationally  speaking,  therefore,  of  the  presently  existing 
stock  of  goods  we  should  only  consume  so  much  in  the  present 
that  the  satisfaction  of  present  wants  is  broken  off  at  the 
same  level  as  the  satisfaction  of  wants  will  be  broken  off 
in  future  economic  periods— considering  the  then  state  of 
wants  and  satisfactions : everything  over  that  should  be 
preserved  for  the  service  of  the  future.  In_term8  of  this  rule 
“ parent  wealth  ” should,  economically,  almost  always  be  saved. 

For,  if  it  were  consumed  in  the  present  along  with  income, 
the  presept  would  be,  relatively,  over-provided,  and  provision 

/ ^ The  possibility  of  a complete  harmony  of  satisfaction  is  only  now  and  then 

I prevented  through  an  imperfect  divisibility  of  wants  on  the  one  aide,  and  of 
I units  of  goods  on  the  other.  See  my  Grundzuge  in  Conrad’s  Jahrbuchtr,  vol.  xiii. 
p.  68,  and  in  particular  Wieser’s  Ursprung  und  Haupftgesetze,  p.  148. 

^ It  must  not  be  thought  that  this  equilibrium  of  provision  is  reached  if  the 
available  sum  of  goods  is  divided  over  the  various  periods  of  time  in  entirely 
equal  amounts,  so  that  each  period  obtains,  allotted  to  its  consumption,  exactly 
the  same  quantity  of  goods.  The  position  of  wants  also  changes.  A bachelor 
has  to  provide  for  fewer  wants  than  the  father  of  a family  ; a healthy  man  has  to 
make  much  less  expenditure  on  the  preservation  of  his  health  than  an  invalid 
and  frail  old  man,  and  so  on.  Now,  obviously,  any  one  would  make  a very 
unsymmetrical  provision  for  his  wants,  who  proposed  to  consume  mechanically 
the  same  amount  of  goods  during  all  periods  of  his  life,  whether  as  bachelor, 
father  of  a family,  or  old  man.  To  secure  anything  like  harmonious  provision 
a man  must  anticipate  a probable  increase  of  wants,  and  meet  it  by  an  increa.y 
of  provision. 


CHAP.  V 


RATIONAL  DISPOSAL  OF  WEALTH 


415 


would  be  made  for  unimportant  classes  of  want ; while,  in  the 
following  years,  only  the  current  income,  and  that  in  decreased 
amount,  would  be  available,  and  the  consequence  would  be  a 
loss  of  satisfaction  affecting  even  important  classes  of  want. 
In  exceptional  cases,  on  the  other  hand,  it  is  directli_fm  the 
lines  of  rational  economic  management  to  lay  hands  on  this 
parent  wealth : at  such  times,  say,  as  the  income  of  the 
present  is  abnormally  small,  or  want  is  abnormally  urgent, 
while  the  prospects  are  that  the  future  will  bring  a more 
favourable  state  of  provision. 

As  regards  the  employment  of  the  current  the 

standard  law  of  harmonious  satisfaction  of  present  and  future 
will  lead  to  a very  difierent  method  of  treatment  in  different 
cases.  People  whose  future  i.^j  spcurerl  by  safe  permanent 
income,  and  who,  at  the  same  time,  do  not  expect  any  essential 
increase  of  their  wants,  may,  quite  reasonably,  ennsume  tbp.iy 
entire  current  income  in  the  c.urrp.nt  period. — such  people,  for 
instance,  as  rich  landowners  who  have  not  a very  large  family, 
or  who  have  no  wish  to  secure  each  of  their  children  in  a 
similarly  comfortable  life.  People,  again,  whose  future  income 
is  uncertain  or  decreasing,  or  people  whose  future  wants — 
either  their  own  or  their  families’ — wiU  rise  while  their  in- 
come is  likely  to  remain  unchanged,  must,  economically,  retain 
a portion  of  their  present  income  against  the  more  poorly 
provided  for  wants  of  the  future : they  must  “ save,”  and  must 
save  enough  to  put  the  present  and  the  future  on  a level  as 
regards  pro\dsion. 

To  be  exact : something  more  should  be  saved,  and  the 

promsion  be  made  a gradually  augmenting  one.  The  reason 
for  this  lies  indeed  in  the  existence  of  interest.  Interest  on 
capital  being  a fact,  what  we  have  to  choose  between  is  not 
whether  £100  worth  of  wealth  gives  us  more  utility  according 
as  we  consume  it  to-day,  or  consume  it  next  year,  or  consume 
it  in  two  years.  The  £100  saved  to-day  increases  in  the  next 
year,  through  interest,  to  £105  ; in  the  next  again  to  £110, 
and  so  on ; and  the  choice  now  is  whether  it  is  more  useful  to 
]is  to  consume  £100  to-day,  or  £105  next  year,  or  £110  the 
next  again.  And  we  shall  increase  the  total  amount  of  our 
utility  by  withdrawing  more  and  more  goods  from  the 
present  so  long  as,  with  £105  in  next  year,  or  £110  m next 


416 


THE  MARKET  FOR  CAPITAL 


BOOK  VII 


again,  and  so  on,  we  can  secure  a greater  marginal  utility  than 
by  £100  in  the  present  year.  Thus  while,  if  there  were  no 
interest,  the  limit  of  rational  saving  would  be  the  point  at 
which  the  utility  obtainable  with  just  £100  now,  and  with 
£100  obtainable  at  various  future  periods,  is  exactly  the  same, 
that  limit,  when  interest  is  a fact,  is  the  point  where  the  pro- 

vision for  the  various  periods  is  so  adjusted  that  £100  to-daw 
are  as  ushFuI  as  £105  next  year,  £110  in  two  years,  and  so 
on.  But  if  an  increasing  expenditure  in  the  future  only 
gives  the  same  amount  of  utility,  it  presupposes  that,  as 
time  goes  on,  wants  of  less  and  less  urgency  are  satisfied — in 
other  words,  that  the  provision  for  future  periods  is  becoming 
progressively  more  ample.^ 

Thus  it  would  be  if  the  principle  of  “ economical  conduct  ” 
were  followed  with  mathematical  exactitude.  But  one  might 
almost  say  that  there  is  no  point  where  it  would  be  so  difficult 
for  men  to  act  up  to  the  claims  of  this  principle  as  here.  Ta 
divide  their  stock  of  goods  adequately  betweemjf^reaent  and 
future,  they,  would  require  to  know  exactly  both  the  future’s 

want  and  the  future’s  provision — the  provision  which  the  future 
periods  when  they  come  will  make  for  themselves.  But  men 
have  merely  vague  conjectures  as  to  both  amounts.  Even  as 
to  the  momentous  question  of  how  many  future  periods  should 
in  general  be  provided  for,  the  uncertainty  of  human  life  makes 
them  grope  about  completely  in  the  dark — an  uncertainty 
whicli,  ifinust  be  said,  has  no  disUirbing  influence  f)n  the  eco- 
nomical transactions  of  that  very  large  class  who  are  anxious  to 
provide,  not  only  for  themselves,  but,  with  as  much  or  even 
more  devotion,  for  their  heirs.  All  the  more  sensibly,  how- 
ever, is  economical  conduct  disturbed  by  the  familiar  psycho- 
logical fact  that  almost  all  men,  in  greater  oi'  less  degree, 
underestimate  the  future  and  its  wants. 

Under  the  influence  of  the  circumstances  just  described 
' the  economical  conduct  of  human  aflairs  suffers  a twofold 
deviation  from  the  ideal  of  economical  provision.  First : men 
provide  for  the  future,  on  the  average,  more  insufficiently  than 
they  should.  They  do  not  distribute  their  goods  between 
present  and  future  in  such  a way,  that  the  marginal  utility  of 

' That  is  to  say  ; — the  utility  of  £105  in  the  future  is  equal  to  the  utility  of 
£100  now,  only  on  the  condition  that  the  community’s  wealth  is  increasing.  , 


CHAP.  V DEVIATIONS  FROM  ECONOMIC  PROVISION 


417 


the  unit  of  goods  allotted  to  the  present  is  equal  to  the  effective 
marginal  utilities  of  those  units  allotted  to  future  periods  and 
increased  by  the  intermediate  inter'est.  They  distribute  them 
in  such  a way  that  the  marginal  utility  of  the  present  unit  of 
goods  is  equal  to  the  marginal  utility  of  the  units  assigned  to 
the  future,  ns  that  marginal  utility  is  perspectivcly  reduced. 
They  save  something  for  the  future  only  in  so  far  as  it 
is  clear  that,  if  they  did  not,  they  would  have  to  do  without 
future  satisfactions  whose  urgency,  even  as  partially  under- 
estimated by  them,  still  appears  as  great  as  the  urgency 
of  the  last  present  wants  which  are  satisfied,  while  its 
real  urgency  is,  to  a more  or  less  degree,  greater.  Since  the 
partial  imrlprvabia.tion  of  the  future  varies  excessively  in 

different  individuals,  classes,  and  nations.,  the  divergence  from 
the  ideal  of  economic  provision  caused  by  it  is,  naturally,  very 
different  in  degree.  Among  prudent  and  savingly  disposed 
peoples  its  influence  will  be  almost  nil;  in  others  it  will  show 
itself  only  in  an  insufficient  percentage  of  saving ; in  others, 
again,  in  the  absence  of  all  saving,  or  even  in  light-hearted 
squandering  of  parent  wealth.  Second : economical  delibera- 
ting r»n  t.ViA  of  present  and  future  is  not  often  a finely 

worked- out  piece  of  economic  calculation.  For  the  most  part 
it  is  only  a rough  and  ready  reckoning  of  tendencies.  For 
exact  action,  before  deciding  whether  to  “ spend  ” or  “ save  ” a 
particular  sum  of  goods,  one  would  always  have  to  be  making 
an  accurate  picture  of  want,  provision,  and  marginal  utility  for 
the  current  period,  and  another  picture  of  want,  provision,  and 
marginal  utility  for  all  future  periods.  But  this  is  a piece  of 
work  which  is  somewhat  difficult,  always  troublesome,  and  one 
that,  in  spite  of  all  care,  offers  no  guarantee  of  any  correct  result; 
for,  in  dealing  with  the  future,  one  is  always  comnelled  to- work 
with  very  uncertain  and  conjectural  data.  In  these  circum- 
stances not  only  is  it  easily  explained,  but,  from  the  point  of 
view  of  economical  conduct,  it  is  even  commendable  ^ that  the 
majority  of  men,  instead  of  repeating  from  one  case  to  another, 
or  from  one  year  to  another,  the  troublesome  and  yet  deceptive 
calculation  of  the  claims  of  present  and  future,  should,  Oince  for 
all,  accept  the  guidance  of  an  economic  tendency  which  suits 
their  circumstances  fairly  well,  and  only  make  a revision  on 

^ See  my  Grundziige  in  Conrad’s  Jahrhiicher,  vol.  xiii.  p.  74. 


418 


THE  MARKET  FOR  CAPITAL 


BOOK  VII 


occasion  of  great  changes  in  their  economical  position,  such  as 
a marriage,  receiving  a legacy,  and  the  like. 

Very  often  this  rough  and  ready  way  of  economic  delibera- 
tion takes  this  form ; — that  persons,  to  whom  the  exact 
application  of  the  principal  rules  of  economical  conduct  is  too 
troublesome,  make  a secondary  rule  for  their  circimistances, 
and  for  the  time  live  up  to  it.  One  man,  for  p.yaTnpIp.^  maVp.g 
it  an  inviolable  rule  to  keep  his  parent  wealth  intact : another, 
to  leave  his  cumbered  estate  free  to  his  children : a third,  to 
put  past  so  much  that  he  may  leave  each  child  a farm : a 
fourth,  to  save  enough  to  yield  himself  £500  a year,  and  so 
on.  Secondary  rules  like  these  will  generally  coincide,  more  or 
Tops,  for  those  who  adopt  them,  with  the  demands  of  the  true 
principle  of  economic  conduct.  Sometimes,  however,  they  do 
not  thus  coincide,  with  the  result  that  the  people  who 
faithfully  follow  their  secondary  rule  sin  grievously  against 
the  primary  law.  For  instance,  it  is  grossly  uneconomic 
conduct  in  any  one  to  cling  doggedly  to  his  resolution  of  not 
breaking  on  his  parent  wealth,  and  refuse  the  costly  treatment 
necessary  to  restore  his  health ; it  is  uneconomic  not  to  make 
some  sacrifice  for  the  education  of  one’s  children ; and  so  on. 
Finally,  a great  deal  of  uneconomic  conduct  arises  from  the 
fact  that  people  who  have  once  got  into  a definite  habit_of 
saving,  quite  reasonable  at  the  time  when  it  was  commenced. 

persist  in  it.  in  a wooden  sort  of  way,  when  their  economic 
position  has  entirely  altered.  How  often  do  we  see  people  on 
the  very  brink  of  the  grave,  who  have  become  rich  through 
great  saving,  still  grudging  everything  to  themselves  and  others, 
and  continuing  fo  scrape  and  hoard  mechanically  for  love  of  it. 
They  begin  with  saving  for  love,  and  they  end  with  love  for 
saving 

Of  these  two  deviations  from  the  ideal  economic  conduct, 
the  first  mentioned  is  the  more  important  .and  the  more 
pernicious.  The  neglect  of  exact  calculations  prevents  people 
from  following  closely  the  guidance  of  economic  conduct,  but 
it  very  seldom  prevents  them  from  being  more  or  less  true 
to  it ; while  the  psychological  undervaluation  of  the  future 
forces  men  positively — and  often  far — off  the  lines  of  economic 
conduct.  Tn  the  undervaluation,  of  the  future,  we  have 
thus  to  notice  a factor  of  interest  and  of  the  interest  rate. 


CHAP.  V 


THE  WAGE  FUND  THEORY 


419 


which,  economically,  is  not  at  all  a pleasing  one,  but,  practi- 
cally, is  a very  active  one.  In  an  earlier  chapter  we  saw 
that  it  co-onerates  in  the  origin  of  the  phenomenon  of  interest.  \ 
in  so  iar  as  it  assists  to  give  a^foundation  for  an  undervaluation  | 
of  future  as  against  present  goods : now  we  come  to  recognise  ■ 
it  also  as  an  exceedingly  active  indirect  determinant  of  the 
rate  of  interest.  The  stronger  its  action  in  a community,  the 
higher  will  interest  rise  in  that  community.  For  the  partial 
undervaluation  of  the  future  leads  to  curtailing  the  claims  of 
the  future  as  against  those  of  the  present ; to  assigning  too 
many  instruments  of  satisfaction  to  present  wants  and  too  few 
to  future.  But  this  leads,  on  the  one  hand,  to  an  increase  of 
the  present  claims  on  subsistence,  and,  on  the  other  hand,  to  a 
wasteful  nibbling  at  the  stock,  or,  at  least,  to  an  inadequate 
renewal  and  increase  of  it  through  saving : and  thus  em.erges. 
the  situation  favourable  to  a high  rate  of  interest,  ydz.  that  a 
(relatively)  small  subsistence  fund  is  eaten  up  by  (relatively) 
heavy  claims  on  subsistence,  and  so  suffices  only  to  defray  these 
claims  for  a relatively  short  period. 

The  theory  I have  put  forward  has  a certain  resemblance 
to  the  noted,  or  perhaps  I should  say  notorious,  “ Wage  Fund 
theory  ” of  the  older  English  school.  Like  it  I maintain  tha 
existence  of  a certain  Subsistence  Fund^  from  which  the  wages 
of  labour  in  any  country  are  defrayed,  and,  like  it,  I attribute 
to  the  amount  of  the  subsistence  fund  an  important  influence 
on  the  reciprocal  height  of  wage  and  interest.  But  here  the 
resemblance  ends.  All  the  other  features,  and,  among  them, 
the  most  essential  features  of  both  theories,  are  widely  divergent. 
The  Wage  Fund  of  English  economists,  although  con.sidered  by 
them  a given  and  fixed  amount,  is  really  a fluctuating  indefinite 
amnnnt  • an  amount  which,  consequently,  cannot  give  any 
secure  point  of  support  on  which  to  base  any  conclusion  as  to 
the  height  of  wage.  I mean  that  the  “ amount  of  capital 
destined  by  capitalists  to  pay  wages  ” is  neither  equivalent  to 

the  total  national  capital,  nor  to  the  total  “ circulating  capital.” 
nor  yet  to  any  one  fixed  quota  of  the  national  capital.  It 
represents  a variable  portion  of  the  community’s  wealth,  and  a 
portion  the  extent  of  which  varies  directly,  among  other  things, 
with  the  height  of  wages  : it  is  greater  when  and  because  wages 


420 


THE  MARKET  FOR  CAPITAL 


BOOK  VII 


have  risen,  smaller  when  and  because  wages  have  fallen.  In 
explaining,  then,  the  rate  of  wages  by  an  amount  which  itself 
is  conditioned  by  the  rate  of  wages,  the  Wage  Fund  tbp.nry 
describes  a circle.^  My  Subsistence  Fund,  on  the  other  hand- 
starts  with  a fixed  given  amount — the  stock  of  wealth  accmmi^ 

lated  in  a community.  Of  course  that  amount  of  goods  which 
specially  serves  as  subsistence  for  labourers,  and  which  1 
might  call  the^^Wage  Fund,”  forms  a part  of  the  total  subsist- 
ence fund.  But  the  amount  of  this  portion  does  not  hang  in 
the  air,  as  it  does  in  the  English  theory : in  exactly  analysing 
what  parties  share  in  the  total  subsistence  fund,  and  according 
to  what  laws,  my  “ wage  fund  ” becomes — at  least  relatively- 
fixed  and  definite. 

But  the  most  important  difference  is  the  following.  The 
English  theory  has  it  that  the  rate  of  wages  is  simply  got  by 
dividing  the  wage  fund  by  the  number  of  existing  workers. 
This,  is  entirely  wrong.  In  any  case  the  labourers  get  the 
wage  fund  wholly  and  entirely  as  wage : but  that  does  unt  say 
wage  for  what  time ; — for  one  year,  or  two  years,  or  three 

years,  or  more.  The  increasing  of  the  subsistence  fund  has  not 
at  all  the  result,  assumed  by  the  English  school,  that,  the 
number  of  labourers  remaining  constant,  the  rate  of  wage  rises 
in  the  same  proportion  as  the  amount  of  the  fund  increases. 
The  increase  of  the  subsistence  fund  is,  in  the  first  instance 
and  principally,  used  up  in  lengthening  the  production  period ; 
and  it  is  only  in  so  far  as  the  lengthening  of  the  production 
period  leads,  at  the  same  time,  to  a decrease  of  the  surplus 
returns  (according  to  the  diminishing  scale  of  surplus  returns 
which  accompanies  successive  extensions  of  production)  that  it 
leads  to  a curtailment  of  the  capitalist’s  share,  and  to  a pro- 
portionate rise  in  the  wages  of  labour ; the  rise  too  being  in  a 
much  weaker  ratio  than  the  increase  of  the  subsistence  fund. 
The  Engh'sh  Wage  Fund  theory  has  thus  a core  of  truth,  but 

it  is  wrapped  up  in  a quite  overpowering  mass  of  error.^ 

* See  the  short  and  clear  statement  by  Mithoff  in  Schdnberg’s  Handbuch. 
second  edition,  vol.  i.  p.  643,  particularly  note  53. 

^ I do  not  at  all  pretend,  in  the  somewhat  sketchy  suggestions  which  this 
chapter  contains  on  the  subject  of  wage,  to  have  given  a perfect  theory  of  that 
matter.  In  particular,  my  occasional  remarks  have  only  dealt — in  a half-com- 
^ete  sort  of  way— with  one  of  the  sides  that  comes  into  consideration  as  regards 
wages  ; viz.  .the  relation  of  wage  and  interest.  On  the  other  hand,  I have  given 


CHAP.  V CONSISTS  OF  MANY  PART  MARKETS 


421 


And  now  we  may  dispense  with  one  last  abstraction 
which  has  served  us  as  scaffolding  in  our  work  of  explana- 
tion. Hitherto  we  have  represented  the  total  supply  and 
the  total  demand  for  present  goods  as  concentrated  in  one 
single  great  market.  Instead  of  this,  the  commerce  in  pres.giLt 
and  future  commodities  is  split  up  into  innumerable  part  m^- 
kets.  First  it  is  divided  into  certain  great  groups,  such  as  the 
Loan  inarket,  the  Labour  market,  the  Land  market,  the  market 
for  Concrete  Capital.  And  each  of  these  markets  is  divided  up 
again  and  again,  partly  according  to  branches,  partly  according 
to  districts  of  business.  There  is  one  market  for  mortgages, 
another  for  business  credit  in  connection  with  large  undertakings, 
and  still  another  for  business  credit  in  connection  with  small. 
There  are  different  loan  markets  for  the  peasant  and  for  the 
citizen,  for  men  of  position  and  for  the  poor  artisan  or  factory 
hand,  and  so  on.  And,  again,  within  each  of  these  subdivisions 
there  are  as  many  distinct  local  markets  as  there  are  natural 
or  artificial  districts  devoted  to  that  particular  department  of 
economic  Life.  The  Labour  market,  too,  is  as  much  split  up  as 
the  Loan  market ; first,  there  are  as  many  groups  as  there  are 
branches  of  labour,  and  then  each  group  is  divided  up  into  as 
many  part  markets  as  there  are  local  districts.  And  so  on 
through  all  the  chief  groups  above  named. 

What  results  from  this  division  and  subdivision  ? — As 
there  is  not  one,  market  only  for  present  goods,  neither  is  there 
only  one  price  for  them,  but  many  and  diverging  market 
prices,  as  these  arise  directly  out  of  the  relation  of  supply  and 
demand  ruling  in  each  of  the  individual  part  markets.  There 
are  in  the  community  ttip  rattip  morn  cot  perhaps  a hundred 
different  agios  on  present  goods,  and,  accordingly,  a hundred 
different  rates  of  interest.  But  the  hundreds  or  thousands  of 
part  markets  are  not  hermetically  sealed  against  one  another. 
They  are  all  in  communication,  and  constantly  engaged  in 

no  express  consideration  to  another  side  which  is  at  least  as  important, — the 
question  as  to  the  influence  exerted  on  the  rate  of  wages  bv  the  difficulty  that 
exists,  in  consonance  with  the  law  of  diminishing  returns,  for  an  increased 
number  of  people  to  obtain  the  necessary  subsistence  from  the  earth.  All  the 
same,  the  attentive  reader  may  find  in  this  book,  if  in  scattered  form  yet  tolerably 
completely,  the  foundation-stones  on  which  the  principles  of  a theory  of  wage 
might  be  built ; partly  in  the  theory  of  complementary  goods  (p.  170),  partly 
in  my  explanation  of  the  law  of  costs  (p.  223),  partly  in  the  present  chapter. 


422 


THE  MARKET  FOR  CAPITAL 


BOOK  VII 


arbitrating  each  other’s  prices.  If  in  one  part  market  the 
agio  on  present  goods  is  for  the  time  abnormally  high,  new 
amounts  of  capital  quickly  press  into  it  to  get  the  advantage, 
and  thus  reduce  the  advantage  again  to  zero.  If,  conversely, 
in  one  part  market  the  agio  is  for  the  moment  abnormally  low, 
the  fact  is  sufficient  to  prevent  any  further  accession  of  capital, 
and  even  to  convey  a part  of  the  capital  employed  in  it  to 
other  and  more  favourable  part  markets,  till  such  time  as  the 
unfavourable  difference  of  price  again  disappears. 

It  is,  therefore,  quite  right  to  say  that  the  price  which 
obtains  in  each  part  market  is,  indeed,  first  determined  by^the 
relation  of  supply  and  demand  as  it  exists  in  the  special  part 
n^irkat,,  while  this  local  condition  of  the  market  itself,  and 
with  it  the  local  price  also,  is  determined  indirectly  by  the 
immensely  more  powerful  pressure  exerted  by  the  totality  of 
supply  and  demand  over  the  whole  community.  The  vast 
mais  of  "the  national  supply,  acting  under  the  influence  of  those 
tendencies  to  equalisation  with  which  we  are  famihar,  forces 
itself  into  all  part  markets  in  proportional  amounts.  Part 
markets,  where  there  is  not  sufficient  capital,  it  hurries  from 
other  quarters  to  supply : from  part  markets  over -supplied 
it  flows  oflp  to  other  communicating  part  markets.  And 
if  there  is  neither  inflowing  nor  outflowing,  and  if,  there- 
fore, the  local  market  seems  to  form  its  local  price  purely  of 
its  own  power,  it  is  then  that  it  is  really  least  independent : it 
does  not  require  to  yield  to  any  foreign  market  influences  at 
the  moment  just  because  it  has  so  completely  yielded  to  them 
already.  It  is  for  the  moment  at  rest  only  because  it  is 
supplied,  in  exactly  the  proportion  which  is  required  and 
effected,  by  the  pressure  coming  from  the  total  relation  of 
supply  and  demand  over  the  community. 

It.-was  then  no  empty  abstraction  when  we  spoke  of  one 
united  gigantic  market  for  present  goods,  and  of  the  laws  of 
its  united  market  price.  The  circumstances  of  the  whole 
decide  on  the  average  amount  of  supply  given  to  the  part 
markets.  Local  influences  may,  for  long  or  for  short  periods, 
raise  the  supply  above  the  average  level  in  one  place,  and 
depress  it  below  the  level  in  another,  but  these  are  only 
secondary  phenomena,  showing  themselves,  as  it  were,  on  the 
surface  of  the  principal  onovement,  and  carried  up  or  down 


CHAP.  V HINDRANCES  TO  A LEVEL  OF  INTEREST 


423 


•with  it — ^just  as  the  surface  of  a great  wave  is  furrowed  and 
ridged  by  smaller  wavelets  that  rise  and  fall  with  it. 

If  the  mobility  of  capital  were  perfect,  the  particular 
divergences  from  the  normal  rate  of  interest  could  not  have, 
any  considerable  strength,  and  still  less  any  considerable 
duration.  But  as  matter  of  fact  there  are  numerous  hindrances, 
little  and  great,  which  check  the  levelling  ebb  and  flow  of 
. capital  like  weirs  on  a stream,  and  these  raise  or  depress  local 
prices.  People  do  not  so  easily  change  their  employments  of 
capital.  If  sugar-refining  yields  one  per  cent  more  than  cloth- 
making, a powerloom  weaver  does  not  become  a refiner  on 
a snap  of  the  fingers,  and  it  may  be  a pretty  long  time  before 
so  many  people  have  put  capital  in  sugar-refining  that  the 
rate  of  profit  is  pressed  down  to  the  normal  level.  Indeed, 
in  specially  favourable  circumstances,  one  special  branch 
industry  may  retain  vermanently  an  abnormal  rate  of  agio. 
The  disinchnation  of  a great  many  affluent  people  to  lend  their 
capital,  in  small  amounts  and  without  security,  to  necessitpug 
persons,  from  whom  it  is  difiicult  to  get  it  back  without  strong 
personal  effort  and  supervision — or,  it  may  be,  lengthy  pro- 
cesses and  processes  of  distraint  which  are  painful  to  one’s  own 
feelings, — almost  universally  keeps  the  supply  in  this  particular 
loan  market  permanently  and  abnormally  low,  and  the  agio 
permanently  and  abnormally  high — even  disregarding  the  deduc- 
tion which  must,  of  course,  be  made  in  this  case  for  premium 
against  risk.  And,  similarly,  the  discount  market  may  enjoy 
a^permanently  and- abnormally  low  rate  of  interest,  owing  to 
the  frequent  inflow  of  large  amounts  of  capital  seeking  short 
temporary  employments,  and,  naturally,  not  finding  such  either 
in  the  mortgage  market,  or  in  agricultural  loans,  or  in  industrial 
investments.  The  great  security  of  the  investment,  again, 
and  the  prospect  of  future  rise  in  value,  keeps  the  rate  of 
interest  in  immovables  always  low ; and  considerations  closely 
akin  to  this  account  for  the  present  lower  return  of  interest 
on  state  bonds,  preferences,  etc.,  payable  in  gold  as  compared 
with  those  payable  in  silver  or  paper. 

It  is  not  my  intention  to  pursue  the  fate  of  the  rate  of 
interest  into  all  these  much -tangled  bypaths,  where  special 
circumstances  and  special  considerations  by  the  thousand  may 
drive  it.  The  divergences  from  the  normfil  rate — temporary 


424 


THE  MARKET  FOR  CAPITAL 


BOOK  vn 


(livp.rffp.nofts  eyeB-43ioxe-l]ian  permanent — are,  in  truth,  in  their 
totolity  a highly  important  phenomenon.  In  them  lies  the 
soul  and  the  source  of  the  greater  part  of  “ undertakers’  profit”; 
that  profit  which  falls  to  the  undertakers  as  fruit  of  their 
prosperous  arbitrage  transactions  in  present  goods.  But  to 
work  this  out  in  detail  is  a task  by  itself ; an  important  and 
grateful  task,  hut  one  which  in  importance  comes  behind  the 
developing  of  the  great  law  of  the  rate  of  interest.  In  any 
case  it  is  a task  milch  too  troublesome  and  much  too  lengthy 
to  tempt  me  to  a new  effort,  when  I am  in  sight  of  home 
after  a long  and  difficult  journey.  I have  stated  the  way  in 
which  the  particular  abnormalities  are  connected  with  the 
chief  law,  and  for  the  moment  enough  has  been  done  towards 
understanding  the  theory  of  them. 

And  nov/  to  finish.  On  a former  occasion,  at  the  end  of 
the  historical  part  of  my  work,  I laid  down  the  programme  for 
my  positive  theory  in  the  following  words  : — “ To  find  for  the 
vexed  problem  a solution  which  invents  nothing  and  assumes 
nothing,  but  simply  and  truly  attempts  to  deduce  the  phenomena 
of  the  formation  of  interest  from  the  simplest  natural  and 
psychological  principles  of  our  science.”  I cannot  wish  more 
than  the  recognition  that,  in  the  carrying  out  of  the  work,  I 
have  been  true  to  my  programme.  For  if,  through  logically 
developing  the  elementary  theory  of  value,  I have  succeeded,  in 
obtaining  the  explanation  of  interest,  it  will  give  the  strongest 
security  that  could  be  wished  that  we  are  moving  on  the  right 
lines  with  two  theories,  that  of  vabie  a,nd  that  of  capital.  It  can 
be  nothing  but  a support  for  my  theory  of  capital,  if  that  theory 
can  assert  its  existence  as  the  legitimate  and  natural  outcome 
of  a value  theory  which  has  already  given  so  many  fair  proofs 
of  its  correctness,  and  which  is  now  receiving  adherence  among 
all  systematic  schools  and  in  all  countries  that  have  shared  in 
the  advance  of  economical  theory.  And  for  the  value  theory. 
again,  it  will  be  a new  proof  and,  perhaps,  the  most  powerful 
one,  if,  by  its  instrumentality,  a problem  is  solved  which  all 
theoretical  systems  hitherto  have  attempted  in  vain. 


APPENDIX  TO  PAGE  327 


AMOUNT  OF  SUBSISTENCE  FUND  NECESSARY  BEFORE  ENTERING 
ON  A PRODUCTION  PERIOD  OF  GIVEN  LENGTH 

If  one  year  be  the  period  of  the  production  process  and  the  stage 
period  also  be  one  year,  so  that  no  new  goods,  finished  and 
ready  for  consumption,  are  turned  out  under  a year’s  time,  then, 
obviously,  before  beginning  sucb  a process,  there  must  be  on  hand 
a fund  of  subsistence  containing  sufficient  to  cover  the  entire  wants 
of  the  workers  for  one  year,  and  that  in  a finished  state.  If  we 
caU  the  Subsistence  Fund  S,  and  the  year’s  Want  Y,  then,  in  this 
case,  S = y. 

If  two  years  be  the  production  period,  and  the  stage  period, 
as  before,  be  annual,  it  is  necessary  that,  at  the  beginning  of  the 
production  period,  there  should  be  on  hand  one  year’s  supply 
finished,  and  a second  year’s  supply  half  finished.  In  each  year 
the  finished  year’s  Supply  is  consumed  by  the  workers,  while  the 
half  finished  is  finished  by  the  workers  of  the  second  stage — thus 
securing  the  subsistence  for  the  next  year — and  a fresh  year’s 
supply  is  put  in  hands  by  the  workers  of  the  firSt  stage,  and,  in 
turn,  half  finished.  Here,  therefore,  if  we  call  the  half-finished 
year’s  supply  a half  year’s  supply,  S = 1 ^ Y. 

Similarly  for  a three  years’  production  process,  with  annual 
stages,  we  require  one  year’s  want  entirely  covered,  another  f 
covered,  and  another  ^ covered : or,  one  year’s  supply  finished, 
another  | finished,  another  ^ finished.  In  each  year,  then,  the 
finished  year’s  supply  is  consumed,  the  |-  finished  is  finished  by  the 
workers  of  the  third  stage,  the  J finished  becomes  f finished  by 
the  workers  of  the  second  stage,  and  a further  year’s  supply  is 
newly  created  by  the  workers  of  the  first  stage,  and  is  finished  to 
the  extent  of  ^ — whereby,  at  the  end  of  the  year,  the  status  quo  is 
restored,  and  continuous  provision  is  guaranteed.  S,  therefore, 
here  = lYx|Yx^Y  = 2Y. 


426 


APPENDIX  TO  PAGE  327 


Similarly,  if  the  stage  is  still  one  year,  then  in  a four  years’ 
process  S = (l+f  + J + :^)Y  = 2jY: 

in  a five  years’  process  S = (l  + |-  + f + |-  + -|^)Y  = 3 Y : 
in  a six  years’  process  S = (l  + |-  + -B-  + -i-  + f + i) Y = 3^  Y ; 
in  a seven  years’  process  S = (l  + -f  + -f  + 4-  + T + f + 7-)^  = 4Y: 
in  a ten  years’  process  S = (1  + + iV  + tV  + + tV  + tV  + 

+ T'rr  tV)  Y = 5-|-  Y. 

If  we  look  closely  into  these  figures  we  shall  easily  discover  the 
law  that  underlies  them  : Every  production  period  requires  a fund 
of  subsistence  containing  sufficient  to  cover  half  a year  more  than 
half  the  production  period. 

Suppose  we  continue  our  inquiry  under  the  assumption  of  a 
different  stage  period,  say,  half  a year.  Here  it  is  quite  the  same 
whether  the  stage  period  occurs  under  the  division  of  labour  or  not, 
the  only  thing  essential  being  that,  every  half-year,  finished  con- 
sumption goods  are  turned  out  from  the  total  process.  To  enter 
upon  a one  year’s  process,  with  half-yearly  stages,  what  we  require 
is  a finished  supply  for  one  half-year — during  which  no  fresh  con- 
sumption goods  are  turned  out — and  half-finished  supply  for  the 
second  half-year.  During  each  six  months,  then,  the  finished 
supply  is  consumed ; the  half-finished  is  finished  by  the  workers 
of  the  second  stage  j and  a new  six  months’  supply  is  begun  and 
half  finished  by  the  workers  of  the  first  stage,  whereby  the  status 
quo  is  restored.  S here  = |Y-eJxiY  = |Y-t-:^Y  = fY. 

Similarly  in  a two  years’  production  process,  with  half-yearly 
stages,  we  require  ^Y  + |x|Y-i-|x|^Y  + ^xiY  = (^'+-|-(-;|^-)-J) 
Y = 1^  Y,  while  in  a three  years’  period  we  require  -I-  + -J-  x -g-  + 1 

i f i ^ f + i ^ i + A + tV  + + A + iV  = If 

Here,  again,  the  underlying  laAv  is  plain  : If  the  stage  period 
be  six  months  the  fund  necessary  contains  subsistence  for  three 
months  longer  than  half  the  production  period. 

If  we  were  to  carry  out  our  inquiry  still  further  we  should 
find,  similarly,  that,  where  the  stage  is  three  months,  the  fund  must 
contain  six  weeks’  more  subsistence,  where  it  is  one  month,  must 
contain  two  weeks’  more  subsistence,  than  half  the  production 
period.  And  thus  we  arrive  at  the  general  formula  of  p.  327,  that 
the  fund  of  means  of  subsistence  must  be  sufficient  for  half  the 
production  period  plus  half  the  usual  stage  period. 


INDEX  OF  AUTHORS  MENTIONED 


Bonak,  356. 

Canard,  34. 

Carey,  75,  178. 

Cohn,  23,  100. 

Cossa,  23,  39,  55,  98,  101. 

Dargdn,  53. 

DieU,  169. 

Dietzel,  71. 

Dufresne  du  Cange,  25. 

Engel,  53. 

Fulda,  98. 

Gide,  39,  71,  76,  98,  100,  123. 

Gossen,  81,  132. 

Gross,  238. 

Hermann,  31,  49,  72,  98,  292,  340, 
347. 

Hume,  25. 

Jevons,  32,  57,  76,  77,  81,  87,  90,  132, 
148,  179,  238,  239.  258,  272,  277, 
399. 

Kleinwachter,  23,  31,  40,  57,  76,  100, 
119,  120. 

Knies,  23,  24,  32,  34,  36,  40,  44,  46, 
55,  287,  347. 

Kiihnast,  23,  34,  58,  59. 

Lassalle,  100,  119,  121. 

Lauderdale,  75,  100,  122,  178,  260. 


Launhardt,  33,  238,  278. 

Lexis,  114. 

Loria,  363. 

Lotz,  99. 

Macleod,  33,  58,  179. 

M'Culloch,  34,  50,  52,  54. 

Mangoldt,  87. 

Marx,  23,  32,  57,  100,  123. 

Mataja,  31,  247. 

Menger,  Anton,  371. 

Monger,  Carl,  9.  17,  31,  77,  132,  148, 
170,  179,  180,  193,  196,  202,  210, 
237,  245,  340,  349,  357. 

Meyer,  Kobert,  100,  102,  114,  132,  340. 
Mill,  J.  S.,  13,’  98,  100,-237. 

MithoflF,  87,  420. 

Neumann,  71. 

Ofner,  53. 

Pierson,  39. 

Rae,  237. 

Eau,  101. 

Ricardo,  356. 

Ricca-Salerno,  23,  24,  39,  50,  55,  101. 
Rodbertus,  23,  29,  39,  43,  56,  62,  71, 
81,  83,  87,  100,  119,  121. 

Roscber,  35,  43,  55,  72,  87,  100,  271, 
296. 

Sax,  39,  50,  71,  132,  210,  238,  240, 
258,  278,  340. 

Say,  29,  34,  50,  59,  75,  97,  178,  179, 
260,  292. 


428 


INDEX  OF  A UTHORS 


Schiiffle,  53,  54,  93,  292,  347. 
Scharling,  137,  160,  221. 

Schmoller,  54,  69. 

Schbn,  98. 

Schonberg,  39,  55. 

Senior,  98,  237. 

Smith,  Adam,  26,  34,  39,  49,  50,  75> 
97,  100,  103,  237. 

Spitzer,  354. 

Strasburger,  75,  178. 

Supino,  23,  39. 


Thunen,  87,  213,  394, 

Turgot,  25,  35,  42,  49. 

Umpfenbach,  23,  25,  50. 

Wagner,  23,  29,  39,  62,  67,  72,  100. 
119. 

Walker,  F.,  100. 

Walras,  33,  50,  132,  149,  179,  396. 
Weiss,  53. 

Wieser,  148,  178,  185,  187,  414. 


THE  END 


I 


331 

B67IP 


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Bohm-Bawerk,  Eu|en  V. 

The  Positive  Theory  of  Capital 


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